Refinance Boom Ignites as Mortgage Rates Slide to Lowest Level in Nearly a Year
Mortgage rates fell last week to their lowest level since October of last year, and homeowners wasted no time reacting. In an economy still clouded by uncertainty, the chance to lock in lower monthly payments triggered a surge in refinance activity as borrowers rushed to capture additional savings.
According to the Mortgage Bankers Association’s seasonally adjusted index, applications to refinance a home loan jumped 58% from the previous week and were 70% higher than the same week a year ago. As a result, refinances took over the market mix, rising to 59.8% of all mortgage applications, up sharply from 48.8% just one week earlier. The drop in rates clearly proved to be the spark many homeowners had been waiting for.
The move came as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $806,500 or less slipped to 6.39% from 6.49%. Borrowers also saw slightly lower upfront costs, with average points falling to 0.54 from 0.56 for loans with a 20% down payment, including the origination fee. Even a modest decline of a tenth of a percentage point can mean thousands of dollars in long-term savings on larger loans, which helps explain the intensity of the response.
That trend was reinforced by the size of the loans being refinanced. Mike Fratantoni, senior vice president and chief economist at the MBA, noted that homeowners with bigger mortgages were the first to seize the opportunity, with the average refinance loan size reaching its highest level in the 35-year history of the MBA’s survey. For borrowers with large principal balances, even a small move lower in rates can significantly reduce monthly payments or shorten the remaining term of the loan.
Adjustable-rate mortgages, or ARMs, saw particularly strong momentum. Refinance applications for ARMs were robust enough to push their share of total applications to 12.9%, the highest since 2008. Unlike many of the products that contributed to risk before the financial crisis, today’s ARMs generally come with initial fixed periods of five, seven or ten years, which helps protect borrowers from immediate payment shock. Those who choose an ARM are also being rewarded with lower pricing: in many cases, ARM rates are roughly 75 basis points, 0.75 percentage point, below the rates on comparable 30-year fixed mortgages.
Homebuyers, by contrast, were more measured in their response to the rate decline. Applications for a mortgage to purchase a home rose 3% over the week and were 20% higher than the same week a year earlier. That increase signals improving demand compared with last year’s depressed levels, but it is nowhere near the explosive growth seen on the refinance side, reflecting ongoing affordability challenges, limited inventory in many markets and lingering caution among would-be buyers.
Rates continued to edge lower at the start of this week, ahead of a closely watched Federal Reserve meeting. The average rate on a 30-year fixed mortgage dropped to 6.13%, its lowest reading since the end of 2022, according to Mortgage News Daily. Still, there is no guarantee that today’s relief will last. Some analysts warn that if the Fed does cut interest rates, bond markets could react with a sell-off, pushing yields and mortgage rates higher again, as happened following a previous rate cut last year. For now, though, homeowners ready to refinance are finding some of the most favorable conditions they’ve seen in months, and they are moving quickly to take advantage.