Some homeowners with 4% mortgage rates are refinancing, one mortgage broker says
Mortgage rates may have inched up to the highest level in nearly eight months, but that's not stopping one group from jumping into the market.
Some homeowners are sinking their teeth into mortgage refinances, cashing in on the equity they have in their home and sending refinance activity soaring over the latest week.
Refinance activity jumped about 44% in the week of Jan. 10, as compared to the previous week. To be sure, refinance activity dropped off over the holiday period, so the increase looks larger than usual.
Fannie Mae's chief economist, Mark Palim, told MarketWatch that the uptick in refinances could be a one-off, rather than a sign that the market is on the precipice of a refinance boom.
But even Fannie Mae's refinance index, which looks at the dollar volume of refinance applications, rose 47% from the previous week.
The week-over-week jump is noteworthy given the sluggish state of the U.S. housing market.
Mortgage rates are elevated, and homeowners have little reason to swap their existing lower-rate mortgages for a higher rate. The 30-year mortgage averaged 7.09% as of Jan. 10, according to the Mortgage Bankers Association. The 30-year rate has moved up for five weeks straight, and home buyers have steered clear of the market.
Yet multiple industry sources show an uptick in refinances in early January.
In addition to the 44% jump in homeowners refinancing a conventional mortgage, there was a 43% jump in homeowners refinancing a government-backed mortgage, such as a Federal Housing Administration loan.
The Fannie Mae index, another measure of refinancing demand, showed an increase of 47% over the last week, and a 11% increase from a year ago.
Amir Nurani, a mortgage broker and the owner of Left Coast Leaders, said he's seen an uptick in inquiries about refinances. "The phone calls and conversations we're having are for people that want to tap the equity, not necessarily lower the rate," Nurani told MarketWatch. Some want to do cash-out refinances and use the cash to invest in real estate.
Other clients are interested in refinancing as a way to consolidate other debt, like credit-card debt, and pay it off at a lower interest rate, said Nurani, who is based in San Diego.
That's possible when a homeowner has sufficient equity in their property to refinance their mortgage by taking out a new, larger loan. That loan then pays off the old mortgage, and there's enough left over to pay off other debts, according to Debt.org. This allows the homeowner to get away from high interest rates on credit-card debt, and lower the rate on their debts to a more reasonable 7% handle.
"People have been bottling up wanting to get out of this credit-card debt for a long time," Nurani said, and have gotten fed up waiting for mortgage rates to drop substantially. So as a result, "we're seeing a lot of credit-card consolidation and debt-consolidation refinances," he said.
Homeowners are sitting on significant equity in their homes. One report by CoreLogic said that the total net homeowner equity in the U.S. was over $17.5 trillion in the third quarter of 2024, the most recent period for which data is available.
The average homeowner across the U.S. has a loan-to-value ratio of under 50%, meaning that for every $500,000 house, there's $250,000 of equity that's available to homeowners to cash out, Tom Hutchens, president of Angel Oak Mortgage Solutions, told MarketWatch.
"So if they're paying 25% to 30% on a credit card, why not take out a mortgage and tap into that equity?" he said. "Even if your rate is 10%, it's better than paying a credit-card interest rate of 25%-plus." Hutchens said he has also seen demand for refinances increase, with activity growing this January compared with last year.
A small group of homeowners is refinancing to get a lower mortgage rate and trim their monthly payments, Nurani noted. Commonly referred to as rate-and-term refinances, these deals are for those who bought their homes at even higher rates than the current average, and are refinancing their loan without pulling out any equity on their home.
Nurani said it looks to him like the refinance market is about to heat up, albeit at a gradual pace. "We're going to see more people who have been waiting for the magical moment [of lower rates] just get tired of waiting."
Fannie Mae's Palim warned not to read too much into one week's worth of data, but to wait for more evidence of a sustained jump. The bump in refinances over the last week could be an abberation rather than the start of a trend, according to Palim.
"I wouldn't read too much into the jump that you see in the beginning of the year," he said, "particularly given what rates are doing."
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