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A sharp drop in interest rates last week suddenly made millions more borrowers eligible to refinance their mortgages.
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With the average rate on the 30-year fixed now close to 4 percent, 4.9 million borrowers could likely qualify for a refinance that could reduce their interest rates by at least three-quarters of a percentage point, according to Black Knight, a mortgage data and analytics company. That’s a nearly 50 percent increase in the size of that population in a single week.
“While this will certainly impact buying power and housing demand as we enter the spring homebuying season, it’s also had a massive impact on refinance incentive almost overnight,” Black Knight researchers said in a monthly report. “After seeing refinance volumes drop significantly in late 2018, this is a game changer for both the housing and refi markets if rates hold at this level for an extended period of time.”
On a $300,000 mortgage a refinance from 4.81 percent to 4.06 percent would save the homeowner about $133 per month. On a $600,000 loan, it would be twice that savings, or $267 per month.
Of course, it’s important to factor in closing costs, which would be amortized over the length of the loan. For someone not intending to stay in the home for more than a few years, a refinance might not save them much.
The dramatic interest rate drop has definitely caught consumers’ attention, especially since it was the largest one-week decline in a decade. Last November, the rate was just over 5 percent.
“Our call volume has definitely ticked up,” said Matt Weaver, a loan originator at Cross Country Mortgage in Boca Raton, Florida. “We are servicing the calls coming in, but we are also reaching out.”
Lenders lost a lot of refinancing business over the last two years as rates ticked higher. The average rate on the 30-year fixed fell to just below 3.5 percent in the summer of 2016. It then jumped, jogged a bit, but has never hit anywhere near that low since. Refinance volume fell off a cliff, and several lenders had to downsize for lack of business.
With rates coming down, borrowers can not only save money through a refinance, but more borrowers are likely to be eligible.
Appraisals have been an issue in the housing market for buyers and refinancers. Home prices inflated so quickly that some appraisals were not keeping up. Now that home prices are cooling, that is the case less often.
On the flip side, as home prices deflate, borrowers lose home equity. For those homeowners seeking a “cash-out” refinance, the amount they could tap is diminishing. While some borrowers refinance their loans just to save on the monthly payment, others refinance for a larger loan in order to get cash in hand. So-called tappable equity, which is the amount available to a borrower before hitting the required minimum 20 percent equity in a home, fell in the last quarter of 2018 for the second straight quarter, according to Black Knight.
After reaching a high of $6.06 trillion in the second quarter of 2018, tappable equity has since fallen by $348 billion, and by $229 billion in the fourth quarter alone. That caused a sharp drop last year in the amount of equity homeowners cashed out, whether through first mortgage refinances or second home equity loans. With rates now lower, that could change.
“The last time rates were at this level, cash-out withdrawals as a share of available equity were more than 25 percent above where they were in Q4 2018, suggesting we could see a noticeable rebound in homeowners tapping available equity via cash-out refis in coming months given the increased rate incentive to do so,” said Ben Graboske, executive vice president of data and analytics at Black Knight.
—CNBC Producer Lisa Rizzolo contributed to this report.