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Borrowers may be pulling back on refinancing for good reason.
Key points
- Refinance applications are down 50% compared to the same time a year ago.
- Higher mortgage rates, economic uncertainty, and a previous refinance boom could explain that statistic.
Refinancing a mortgage is a great way to eke out monthly savings. By lowering the interest rate on your home loan, you can slash your housing costs and free up money for other things. And given that inflation is making everyday living costs so much more expensive, that’s a smart thing to consider.
But these days, the demand for refinances isn’t all that high. The Mortgage Bankers Association reports that for the week ending Jan. 7, refinance demand was 50% lower than it was a year prior. And while there are different factors that could be lending to that trend, here are a few likely causes.
1. Rates are higher
On a historical basis, mortgage rates are currently sitting at competitive levels. But they’re already higher compared to where they were last year, and that may be spooking borrowers. This especially applies to those who already have relatively low rates on their existing loans.
Generally, your goal in refinancing should be to shave about 1 percentage point or more off of your loan’s interest rate. The reason is you’ll pay closing costs to swap an existing home loan for a new one, so you’ll need to eke out enough savings to make those fees worthwhile. But the more refinance rates climb, the less enticing they’ll be.
2. Borrowers’ plans may be up in the air
Because you’re required to pay closing costs to refinance, it’s important to stay in your home long enough to come out ahead financially. Say you’re charged $4,000 in closing costs for a new mortgage that shaves $200 off of your monthly payments. While that’s a nice amount of money to save, it’ll take 20 months to break even after paying your closing costs. If you’re not sure you’ll stay in your home that long, then refinancing becomes a risk.
Although the U.S. economy is fairly strong, we’re in a generally precarious state right now due to inflation and the omicron surge. A lot of borrowers may be in a position where they’re not rushing to refinance because their plans just aren’t so firm.
