Potential homebuyers attend an open house in Seattle.Mike Kane | Bloomberg | Getty ImagesMortgage rates have been on a roller coaster in recent months, and last week’s climb caused a drop in mortgage demand.Mortgage application volume fell 11.9% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was still 54% higher than a year ago because interest rates were significantly higher last year.The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) increased to 4.02 percent from 3.92 percent, with points increasing to 0.38 from 0.35 (including the origination fee) for loans with a 20% down payment. That rate was 109 basis points higher the same week last year.The drop in rates caused a 17% plunge in applications to refinance a home loan.Refinance volume has been strong for the last several months, given the overall lower rate environment, but higher rates are starting to take their toll. Refinance demand was still a healthy 93% higher the same week one year ago, but the annual gains are shrinking.”Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day.” said Mike Fratantoni, the association’s senior vice president and chief economist. “Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.”Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, fell 4% for the week but were 6% higher compared with the same week one year ago.Given how much lower rates are today than they were last year, home sales should be seeing more of a boost. Instead, buyers are facing much higher home prices that are offsetting the savings from lower rates. That is due to the increasingly severe shortage of homes for sale amid higher demand.Home prices in September saw the biggest annual jump in nearly two years, according to the National Association of Realtors. Consequently, sales fell more than expected.