This is all happening as mortgage refinance activity has shot up considerably thanks to lowering interest rates. The average contract interest rate for 30-year fixed-rate mortgages is now 6.39%. This represents a drop from the prior rate of 6.49% and portends a watershed moment for the mortgage market. With today’s low rates around, millions of mortgage holders would benefit from refinancing their loans.
The effective interest rate has fallen to its lowest level since late 2022. Retrospectively, that seems low. It was 6.13% back then. With this decline, the risk scores for these mortgages dropped from 0.56 to 0.54 points. These points are often folded into the origination fees on the loans that still have a 20% down payment requirement.
This resulted in the refinance share of mortgage applications rising to 59.8%, up considerably from last week’s 48.8% share. This spike in refinance applications means that millions more homeowners are making a move to capitalize on these appealing rates.
Refinancing rates climbing to record high levels. At the same time, purchase mortgage applications shot up by 3% over last week, led by a stunning 20% year-over-year improvement at this time of year. Borrowers are doing their very best to insulate their deals and protect whatever terms they can get in this unpredictable environment.
Today’s borrowers who opt for ARMs are benefitting from some major perks. They are now enjoying spreads roughly 75 basis points under their 30-year fixed-rate counterparts. As a result, ARM share of mortgage activity has increased dramatically. It currently accounts for 12.9% of overall applications, an all-time high share for the field since 2008. ARMs typically offer lower fixed rates for the first five, seven, or ten years. This structure greatly reduces the chance of early payment shock, a frequent problem faced by pre-2008 ARMs.
“Homeowners with larger loans jumped first, as the average loan size on refinances reached its highest level in the 35-year history of our survey,” – Mike Fratantoni, MBA’s SVP and chief economist.
These latest trends bode well for a tremendous response from borrowers wanting to take advantage of lower rates. The one-two punch of lower interest rates and higher levels of refinancing activity could dramatically change the mortgage landscape in the months ahead.
“Notably, ARMs typically have initial fixed terms of five, seven, or ten years, so those loans do not pose the risk of early payment shock that pre-2008 ARMs did. Borrowers who do opt for an ARM are seeing rates about 75 basis points lower than for 30-year fixed-rate loans,” – Mike Fratantoni, MBA’s SVP and chief economist.