Rising interest rates and rising home prices are cutting into mortgage demand, as fewer consumers have the incentive to refinance or buy a home.

Total mortgage application volume slipped 0.4 percent last week from the previous week, according to the Mortgage Bankers Association's seasonally adjusted report. Volume now stands 24 percent lower than a year ago.

With interest rates now considerably higher than they were a year ago, applications to refinance have nowhere to go but down. They decreased 2 percent week to week and are down just over 40 percent from a year ago. Refinance volume has been falling for the past month as interest rates inch slightly higher.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $424,100 or less increased to 4.12 percent from 4.11 percent, with points increasing to 0.45 from 0.40, including the origination fee, for 80 percent loan-to-value ratio loans.

"Rates moved higher over the course of last week, at least partially due to signs of stronger economic growth. Four of the five mortgage rates that we track increased," said Joel Kan, an MBA economist.

Mortgage applications to purchase a home are still running well below historical averages and moved just 1 percent higher for the week. They are nearly 5 percent higher than a year ago, but home sales have been weakening for five of the past six months, indicating a slowdown in the overall housing market. That is due less to rising interest rates and more to a lack of homes for sale and higher prices.

One telling sign that first-time buyers are struggling most is a sharp drop in purchase applications for FHA loans, down 8 percent from a year ago. FHA offers a low down payment of just 3.5 percent, making it the loan of choice for first-time or lower-income borrowers. The supply of homes for sale is tightest at the low end of the market, unfortunately where demand is the highest today.

Demand for adjustable rate mortgages is also rising. ARMs offer lower interest rates. Last week, the average rate on a five-year ARM fell to just 3.30 percent. As buyers struggle increasingly to afford a monthly payment, they are choosing these options. ARM rates are fixed for a designated period but then change according to broader market rates.