Weekly Demand To Refinance Mortgages Storms Up 20%, But Is It Too Early To Jump In Now?

According to the Mortgage Bankers Association, this week refinance mortgages surged 20% week-over-week, as consumers who had purchased mortgages between 7% in May 2023 and the market peak of 8.45% in October lit up mortgage lenders' phones after the FED lowered interest rates by 50 basis points on Sept. 11. 

This week, the average 30-year mortgage was 6.13%. Demand for refinancing was up 175% year-over-year, although this number is skewed because almost nobody would have refinanced a mortgage with interest rates at 20-year highs in 2023.

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Looking back at September 2023, existing home sales were weak, with a 2% drop from the previous month to a seasonally adjusted annual rate of 3.96 million units. With a market inventory supply of only 3.4 months, bidding wars were common despite the high mortgage rates. Only 27% of the homes were sold to first-time buyers and 29% were purchased with cash.

This suggests that few buyers were available when mortgage rates were approaching 8%, so many of those who applied for refinances this past week were likely in the 7%- 7.5% interest rate range.

So, were these refinances justified financially or are consumers jumping the gun?

According to financial experts, refinancing is a good idea if the new interest rate is at least 2% lower than the previous mortgage. Lenders often say a 1% decline is good enough, but remember, lenders have an axe to grind for consumers to refinance.

Consumers need to realize that there are additional closing costs for refinancing a mortgage, even if the previous mortgage is only a year or two old. The costs generally run between 2%-5% of the new loan amount and include fees for the application, loan origination and home appraisal.

In July 2023, the median sales price of an existing home was $435,400. By August 2024, it had dropped to $420,600, so very few homebuyers had any equity in their home to put toward a new mortgage, but a small amount of principal would have been paid down in that year. Closing costs on 80% of perhaps $434,000 ($347,200) at the closing cost midpoint of 3.5% would be $12,152.

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With 20% down on $435,400, principal and interest (P&I) on the original 7.5% loan would be $2,789 monthly. Refinancing at 6.0% would drop the monthly P&I by $348 to $2,441. The break-even point to cover the additional closing costs would be 34.9 months or almost three years. However, one must factor in another $5,200 for one additional year of interest as the refinanced loan will last 30 years when only 29 years are left on the original loan. So, instead of three years until break-even, it's probably 4.2 years.

Had the original loan been at 8% instead of 7.5%, the monthly savings would have been $468 instead of $348. Therefore, a 2% rate difference certainly makes more sense than a 1.5% (or smaller) interest rate reduction.

However, another question is: Did consumers wait long enough to refinance? The Fed made it clear they would cut rates at least once more in 2024. A 5.75% mortgage would save another $55 monthly. At 5.50%, the savings are $110 per month.

Mortgage interest is based upon the 10-year Treasury, so rate declines usually precede, not follow, a Fed cut. People frequently get that reversed, which is why the Fed cut precipitated a rush to refinance. Interest rates rose a small amount following the Fed cut.

Given the last few inflation reports, mortgage interest rates will likely decline further before the end of 2024. Waiting another month or two before refinancing a recent mortgage could be a financially smart decision.

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