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As Mortgage Rates Skid, Homeowners Rush to Refinance and Save

Doug Whiteman
As Mortgage Rates Skid, Homeowners Rush to Refinance and Save

Homeowners are responding in a big way to tumbling mortgage rates, which have dropped to the lowest levels in years and have reached all-time lows for midwinter. Applications for mortgage refinance loans have spiked and are coming in at the fastest pace in six and a half years, a trade group says.

But owners who decide to swap out their mortgages and stay in their homes aren't helping to relieve the shortage of houses for sale. Would-be buyers keep struggling to find homes they want, and they've become less eager to borrow.

Homeowners catch the refi wave

Dmytro Zinkevych / Shutterstock
Homeowners are finding great opportunities to refinance.

Overall mortgage applications rose 5% in the week ending Jan. 31, the Mortgage Bankers Association said Wednesday.

The increase was led by homeowners' hunger for refinance loans. Refi applications surged 15% last week to the highest level since June 2013, and they were coming in at nearly three times the rate seen a year ago.

Mortgage rates fell last week for the fifth time in six weeks, notes Joel Kan, the vice president of forecasting for the Mortgage Bankers Association.

"Refinance activity jumped as a result, with an increase in the number of applications and a spike in the average loan amount, as homeowners with jumbo loans reacted more resoundingly to lower rates," Kan says.

Homeowners are still finding opportunities to save by refinancing, even if they closed on their current mortgages as recently as 2018. The data firm Black Knight has estimated that 9.4 million American homeowners could save an average $272 a month by doing a refi.

Refinance applications amounted to 64.5% of all mortgage activity last week, up from 60.4% the previous week.

Homebuyers pull back on borrowing

Kristi Blokhin / Shutterstock
Homebuyers are having trouble finding homes they want.

Mortgage rates have been sinking as investors flock to the safety of Treasury bonds out of concern that the coronavirus will hurt the Chinese and global economies, says Kan. As demand for Treasuries goes up, their yields (interest rates) go down, and mortgage rates tend to tag along.

Thirty-year fixed-rate mortgages last week were averaging 3.51% — close to a three-year low and the lowest ever for late January in the nearly 50-year history of the weekly rates survey from mortgage company Freddie Mac.

Rates on 15-year fixed-rate mortgages fell last week to an average 3%, from 3.04% a week earlier. Those loans are popular refinance choice. One year ago, the 15-year average was 3.89%.

The average initial rate on a 5/1 adjustable-rate mortgage dropped to 3.24%, from 3.28% a week earlier and down considerably from last year's 3.96%. ARMs, as those loans are known, are fixed for five years, and after that the rates can adjust up or down each year.

No matter how attractive they are, low interest rates aren't much help to Americans who want to buy a home — maybe their first home — but don't see anything to their liking, or in their price range.

Kan says that helps explain last week's 8% dip in applications for mortgages to buy homes.

"Prospective buyers weren't as responsive to the decline in mortgage rates — likely because of suppressed supply levels. Purchase applications took a step back, but still remained 11% higher than a year ago," he says.

The outlook for mortgages and housing

Andrii Yalanskyi / Shutterstock
Mortgage rates are expected to stay down this year.

Freddie Mac releases a fresh mortgage rates update on Thursday. Kan says his data indicates rates have hit their lowest spot since October 2016.

Homebuyers and homeowners are likely to find exceptionally low mortgage rates throughout this year. A forecast from Freddie Mac's corporate sibling, Fannie Mae, predicts 30-year mortgage rates will average just 3.7% in 2020, down from 3.9% last year.

Even with the crunch of homes on the market, irresistible mortgage rates are helping to pump up home sales. Sales of existing U.S. homes climbed 3.6% from November to December and hit a two-year peak, and sales of new homes last month shot up 23% from a year earlier.

Builders are struggling to keep up with the demand for houses. New construction surged almost 17% last month to a 13-year high.