Understanding the Recent Surge in Loan Applications: Refinancing vs Home Buying
- jenn74582
- Sep 6, 2024
- 3 min read
Last week’s surge in loan applications may have seemed like a home-buying frenzy, but the reality is quite different. While mortgage applications did hit their highest point since January, this was largely driven by homeowners rushing to refinance, rather than a wave of new buyers entering the market.
According to the Fannie Mae Refinance Application-Level Index (RALI), the volume of refinance applications increased by 32% for the week ending August 9th compared to the previous week. In fact, refinance applications were up a staggering 94.4% from the same week last year. So, if you're wondering whether it’s time to hop on the refinancing bandwagon, now could be the moment to act.
Should You Refinance?
If your current mortgage interest rate sits around 7% or 8%, and you have the opportunity to refinance for a rate just above 6% or lower, it’s definitely worth considering. The traditional wisdom is that refinancing makes sense when you can reduce your rate by at least 1/2 to 3/4 of a percentage point. Since refinancing comes with fees typically ranging from 2% to 6% of the loan amount (according to Freddie Mac), a smaller rate reduction won’t usually offset the upfront costs. If you’re only cutting your rate by 1/4%, it may take a long time for the savings to catch up to the costs.
To see if refinancing works for you, try Fannie Mae’s refinance calculator for a personalised estimate. Remember, some lenders offer "no-closing-cost" refinances, where the fees are rolled into the loan. While this means you end up paying interest on those fees, it can still be a smart move if it significantly lowers your rate.
Adjustable-Rate Mortgages: Time to Act?
For those with adjustable-rate mortgages (ARMs), this could be an ideal time to refinance before your rate adjusts. While inflation has slowed to below 3%, it’s unclear whether interest rates will continue to drop in the long term. As inflation stabilises, refinancing during this temporary dip might be a wise decision before rates rise again.
Why Aren’t Home Buyers Taking Advantage?
Despite the drop in mortgage rates, the expected surge in home purchase applications hasn’t materialised. According to the Mortgage Bankers Association, homebuyer demand has remained neutral, leaving analysts puzzled. You’d think that lower rates would drive buyers into the market, but housing prices haven’t dropped significantly, which may explain the lack of new demand.
Mike Simenson from HousingWire comments, “We haven’t seen any pickup in demand over the last couple of weeks as mortgage rates fell under 7%. This is a bit surprising to me.” So while refinancing is booming, home buying appears to be holding steady, leaving many to wonder why.
Buyer Psychology: A Key Factor?
One possible explanation lies in human psychology. When buyers see the list price of a home, that’s often their primary motivator, rather than the interest rate attached to a mortgage. Homeowners, on the other hand, are already locked into their home price, so their focus is on the rate they’re paying each month. This might explain why refinancing has spiked while home buying has stayed relatively flat.
In conclusion, if you’re a homeowner with a higher interest rate, now is a prime time to explore refinancing options. For prospective homebuyers, the market remains steady, but it will be interesting to see how things evolve as rates continue to fluctuate. If you’re on the fence, it could be time to "buy the dip" in mortgage rates while they last.
Comments