Time to Refi?

May 11, 2020

A younger member of one client family recently secured a mortgage on a first home purchase below 3%, over 10 percentage points lower than the interest rate on the loan his parents obtained to buy their first home several decades ago. Mortgage rates trend with US 10-year Treasury bond yields which were over 15% in the early 1980s, but are less than 1% today.

As mortgage rates hover near all-time lows, we have witnessed rising interest in refinancing especially among clients with existing mortgage rates at 4% and above. With attractive rates on offer, the latest forecast from the Mortgage Bankers Association anticipates over $1.2 trillion in residential mortgages will be refinanced during 2020, with mortgage originations driven by refinancing up by about 10% from 2019 to nearly half of all originations. Fannie Mae foresee refinancing volume in Q2 2020 being the highest since 2012, when the housing market was just beginning to recover from the 2008-2009 financial crisis.

The surge in refinancing activity comes at a time when the U.S. unemployment rate has just spiked to a new record high of 14.7% with over 30 million Americans having recently lost their jobs. Accordingly, lenders have tightened approval standards to the strictest seen in over 5 years.  The latest update from the Mortgage Bankers Association shows mortgage credit availability has fallen to 2014 levels.

For homeowners with home equity, above average credit scores, and whose incomes have not been by adversely impacted the pandemic, reducing their mortgage payments by refinancing may have appeal. The average 30-year mortgage rate is now approximately 3.25%, down 1.5% from just 18 months ago. Borrowers with sterling credit may be eligible for even lower rates. When the interest rate reduction is sufficiently significant, and the homeowner plans to remain in the home for years to come, the effort and cost involved with refinancing may make sense.

Some, including the Wall Street Journal, have recently questioned the resiliency of the mortgage system as millions of homeowners whose incomes have been impacted by the coronavirus request payment relief on their mortgages through forbearance. Through April 26, the Mortgage Bankers Association reported that about 7.5% of mortgages were then in forbearance, representing 3.8 million homeowners, increasing by 300,000 households that week. As forbearance requests trend upward, nonbank lenders who have grown to represent a larger share of mortgage originations may feel squeezed. With less cash coming in from borrowers, mortgage servicers may find it harder to make payments to investors in securities backed by home loans. Under this pressure lenders might have less capacity for mortgage refinancing approvals.

House prices are still relatively steady. Realtor.com reports that 47 of the largest 50 metros saw home prices decline in April, but only in single digit percentages. The year through March saw price gains of 8% for a median priced home according to the National Association of Realtors.

The combination of historically low rates, tightening lending standards, and still-strong home values could make the present moment interesting for homeowners to consider their mortgage situation.

Cam Simonds