Borrowers typically refinance home loans to take advantage of lower mortgage rates.
But recently, refinancing on average has resulted in interest rates 2.4% higher than the pre-transaction rate.
The reason is largely because the only homeowners currently refinancing are doing so to tap equity.
The last time we saw a similar phenomenon was in 2018, when about 70% of refinancing involved raising interest rates.
Prior to that, borrowers saw their average rate increase by 0.4%. What happened?
Refinancing Rates and Duration Hit Record Lows
A new report from Black Knight reveals that 96% of 216,000 mortgage refinances completed in the fourth quarter of 2022 were cash-out loans. This was the highest quarterly share ever.
At the same time, it refinanced at less than 10,000 rates and terms, the lowest on record.
Prior to Q4 2022, the lowest quarterly total was 76,000. In 2018, the average was 650,000 per quarter over the past 15 years.
And in the first quarter of 2021, only one year, there were 1.8 million refinancing per term. which is 190 times more than the fourth quarter of 2022
In 2022, there were 1.98 million total cash-out refinances, representing more than 80% of all refinances for the year.
in other words The refinance market is dominated by cash refinancing. which makes sense
With mortgage rates approaching 7%, there’s very little reason to refinance unless you’re tapping home equity.
The only reason other than saying to remove someone from an existing loan is to switch from an adjustable-rate mortgage to a fixed-rate loan.
But those situations don’t seem like much.
The 216K refinancing in the fourth quarter of 2022 (including 62K in December) is also an all-time low.
And the 863,000 mortgage purchases were the lowest since 2015, bringing overall quarterly mortgage loan volume to a record low. (back to 2000)
The average mortgage refinance drives interest rates 2.4% higher.
Black Knight noted that cash-out refinance volumes are also down, but should “offset the share of refinancing in early 2023 as well.”
Interestingly, 94% of those who refinanced last December raised interest rates in the process.
And general refinancing results in a 2.4 point increase in the borrower’s interest rate!
For example, the borrower may have had a 3.5% rate prior to the refinance. and now has a rate of 5.875%
Of course, if they want cash. they want cash And although interest rates closer to 6% are not as good as 3.5%, they are likely to be higher than interest rates for all other types of loans.
So the money withdrawn can also be used to pay off other debts with much higher interest rates. This could be a two-digit number.
For perspective, the average borrower who refinanced in early 2021 received an average 1.3% drop in mortgage interest rates.
as seen in the chart above Rising mortgage rates after refinancing were also common in 2005-08.
In the past, there was also a lot of cash refinancing. And borrowers often refinance in order to cover discretionary purchases.
Lowest quarterly cash out since 2015
Even with cash withdrawals from refills But just $19 billion of equity was withdrawn during the fourth quarter. which is the lowest total since the beginning of 2015.
And cash outs equaled just 0.2% of equity touched in the quarter. which is the lowest in history
In other words, there are many parts of the house that have not been utilized.
This contrasts with 2006-08 when homeowners tapped every possible penny through CLTV 100% cash refinancing.
However, the average number of shares withdrawn has increased from less than $55,000 in late 2020 to more than $95,000 recently.
Therefore, those withdrawing more money are pulling out.
but average unpaid balance The equity (pre-equity separation) of these borrowers dropped from about $240,000 at the beginning of 2020 to $165,000 in the fourth quarter.
This means that those with low home equity balances and needing lots of cash are taking the cash refinancing route..
Meanwhile, those with high home equity balances choose to keep their mortgage rates low and tap equity through their second mortgage.
By choosing to split equity through a home equity loan, or HELOC, they can hold on to a low fixed-rate mortgage for years to come.
For homeowners increasing their mortgage rates They may benefit from refinancing in the near future. If the rate tends to go back down to 4-5%