Greg Englesbe
Mortgage News

Mortgage refinance activity comes back to life as homeowners pounce on rate drop

The decision to refinance a mortgage is often based on fickle metrics and margins, making it difficult for many homeowners to know exactly when to take advantage of a good opportunity to cut down their monthly payments.

But with the 30-year-fixed mortgage rate on a general upward trend over the last year, any downward retreat of that rate can be enough to trigger a surge in applications.

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In mid-January, mortgage application volume leaped nearly 28% in a single week after the average 30-year-fixed mortgage rate fell from 6.42% to 6.24%. That trend appears to be continuing, at least temporarily, as the rate fell again the week after to 6.15% — down more than three quarters of a point since mid-November. That resulted in a 34% weekly increase in applications to refinance, according to the Mortgage Bankers Association.

Rates reached a high of about 7.2% near the end of October, ending 2022 at 6.58%. In mid-January of last year, the rate was a mere 3.64% before the Federal Reserve initiated a series of prime rate hikes that have significantly cooled off the housing market.

The current jump in refinancing activity is a reflection of the lesson learned a year ago, when millions of homeowners missed a golden opportunity to refinance with rates still historically low. Because rates were increasing at the time, many homeowners were unprepared or didn’t feel ready to make a move. The Mortgage Bankers Association said last January that applications to refinance were down by half from the same time in early 2021.

This January, even little signs of light have been enough to boost applications.

“Mortgage rates are now at their lowest level since September 2022 and about a percentage point below the peak mortgage rate last fall,” said MBA chief economist Mike Fratantoni. “As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.”

While the market for home buyers and sellers remains relatively slow this winter, the refinance share of all mortgage applications has jumped five basis points to 31.2% in January.

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Where the market heads from here will depend greatly on whether signs of cooling inflation in the U.S. stick.

It’s expected that the Fed will make two more small rate hikes before hitting a peak, potentially as soon as the spring if inflation continues to abate and other indicators of a recession wane. Since last March, the Fed has made seven rate hikes to combat inflation, which has left the hot housing market of 2020-21 firmly in the rearview.

If the Fed’s hikes reach the end of a cycle in the coming months, that could signal an ongoing decline in the average 30-year fixed mortgage rate. This would not only open the market back up to more first-time home buyers and help sellers move properties that have been listed for longer than expected. It would continue to revive mortgage applications to refinance.

In the meantime, homeowners looking to refinance will have to decide when the moment is right — taking on some risk by waiting through each of the Fed’s next two rate hikes. It’s a good time for those considering a move to get finances in order and be ready to make the move.

Photo credit: Pexels/Max Vakhtbovych