The recent surge in home prices, a whopping 40% increase from pre-pandemic levels, should ideally prompt homeowners to consider refinancing their homes. However, the reality is quite different. Despite the potential benefits, the prevailing high interest rates, which have more than doubled in the last two years, are dissuading most homeowners from tapping into their home equity.
According to the Mortgage Bankers Association’s latest data, applications for home refinancing have declined for the fourth consecutive week, dropping by 2%. This trend is indicative of the deterrent effect of the current interest rate environment on homeowners’ willingness to refinance. Even though demand is still 28% higher compared to the same period last year, it seems that the financial cost of refinancing at the present rates is deterring many homeowners.
Homeowners collectively held a substantial $17 trillion in equity by the end of the first quarter of 2024, with an impressive increase of $1.5 trillion in just one year. On average, this equates to a gain of $28,000 per borrower. Despite these significant gains in home equity, the incentive to refinance remains limited, as pointed out by Joel Kan, an economist at MBA.
Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased slightly to 7.00%. Meanwhile, the points fell to 0.60 from 0.62, including the origination fee, for loans with a 20% down payment. On the other hand, applications for mortgage loans to purchase a home increased by 1% for the week but were still 13% lower compared to the same period last year. This increase in purchase activity was primarily driven by rises in FHA and VA applications.
Despite Federal Reserve Chair Jerome Powell’s recent testimony before Congress, mortgage rates have remained unchanged this week. However, with new economic data expected to be released soon, especially the consumer price index, it is anticipated that there may be fluctuations in mortgage rates. As Matthew Graham, chief operating officer at Mortgage News Daily, highlighted, the statements from Fed Chair Powell reiterated the messages communicated by several other Federal Reserve officials.
The current scenario presents a dilemma for homeowners considering refinancing their homes. While the increase in home equity is substantial and interest rates have slightly declined, the overall cost of refinancing has become a significant factor that is dissuading many individuals from taking advantage of their home equity at this time.