The demand for refinancing plunges by 50% from one year to the next. These are some of the reasons why

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Borrowers may forgo refinancing for good reason.

Key points

  • Refinancing requests are down 50% compared to the same period a year ago.
  • Higher mortgage rates, economic uncertainty and a previous refinancing boom could explain this statistic.

Refinancing a mortgage is a great way to save money monthly. By lowering the interest rate on your home loan, you can lower your housing costs and free up money for other things. And given that inflation makes day-to-day living costs much more expensive, it’s a smart thing to consider.

But these days, the demand for refinancing is not so high. The Mortgage Bankers Association reports that for the week ending Jan. 7, refinance demand was 50% lower than a year earlier. And while different factors can contribute to this trend, here are some likely causes.

1. Fares are higher

On a historical basis, mortgage rates are currently at competitive levels. But they are already higher than last year, and that may scare off borrowers. This especially applies to those who already have relatively low rates on their existing loans.

As a general rule, your refinancing goal should be to reduce the interest rate on your loan by about 1 percentage point or more. The reason is that you will pay closing costs to exchange an existing home loan for a new one, so you will need to save enough to make these costs worth it. But the higher the refinancing rates go, the less attractive they will be.

2. Borrowers’ plans may be on hold

Because you have to pay closing costs to refinance, it’s important to stay in your home long enough to get out of it financially. Suppose you are charged $4,000 closing costs for a new mortgage, which reduces your monthly payments by $200. While that’s a nice amount of money to save, it will take 20 months to break even after paying your closing costs. If you’re not sure you’ll stay in your home that long, then refinancing becomes a risk.

Although the US economy is quite strong, we are currently in a generally precarious position due to inflation and the omicron surge. Many borrowers may be in a position where they don’t rush to refinance because their plans just aren’t as firm.

3. Many people have already refinanced

When mortgage rates started plunging in the middle of 2020, many people rushed to refinance. This recent drop in demand is also explained by the fact that many borrowers have already obtained new mortgages since the start of the pandemic, and therefore do not need to repeat this process.

Should I refinance?

If you haven’t refinanced your mortgage yet, going this route might be a good idea. But before you do, ask yourself:

  • How is my credit score? If it’s not in great condition, you may not qualify for a competitive mortgage rate on a new loan.
  • Do I already have a low mortgage rate? If so, the savings you realize from refinancing may be minimal or non-existent when you factor in closing costs.
  • Do I stand still for a moment? If you are unsure, you should probably delay refinancing.

Refinancing could be a great way to save money on housing costs, and even though rates today are higher than they’ve been recently, they’re still relatively low. It is important to ensure that getting a new mortgage is the right decision considering the above factors.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.

About Jimmie T.

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