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Mortgage rates have been on a roller coaster for the last year, but now they're sitting at the bottom of the track, giving a major boost to the number of borrowers who can benefit from a refinance.
The average rate on the 30-year fixed mortgage hit a three-year low of 3.73% last week, according to Freddie Mac. That means 8.2 million borrowers could refinance and lower their interest rates by at least 75 basis points, estimates Black Knight, a mortgage software and analytics company. It's the largest group since the end of 2016.
It is also a jump of 6.3 million eligible borrowers since last November, when rates peaked at just over 5%. The average borrower could save about $266 per month, bringing the total amount of potential savings to about $2.2 trillion.
While most borrowers tend to refinance after several years, about 1.5 million borrowers, or 35% of those who took out their loans just last year, could benefit greatly. No surprise that refinances, also referred to as prepayments, have jumped in the past few months as rates began their swoon. Mortgage applications to refinance a home loan were up a striking 92% annually last week, according to the Mortgage Bankers Association.
Refinances for loans originated last year are leading the way, up 300% according to Black Knight.
"While we've observed increases across nearly every investor type, product type, credit score bucket and vintage, some changes stand out," said Ben Graboske, president of Black Knight Data & Analytics. "For instance, prepayments among fixed-rate loans have hewed close to the overall market average, rising by more than two times over the past four months. However, ARM [adjustable-rate mortgage] prepayment rates have now jumped to their highest level since 2007 as borrowers have sought to shed the uncertainty of their adjustable-rate products for the security of a low, fixed interest rate over the long haul."
Refinancing can lower monthly payments, but it can also provide easy money for homeowners with high levels of home equity. Given the steep rise in home values over the past three years, homeowners currently hold an aggregate $5.98 trillion in tappable equity. Tappable equity is generally considered the value of the home beyond the 20% retained equity most lenders require.
Of the 44 million borrowers who currently have at least 20% equity in their homes, the average amount they can tap is $136,000, according to Black Knight.
While tappable equity had been growing quickly, it's now slowing as home prices moderate. Last summer, there was $6.06 trillion in total. Tappable equity continues to grow in 47 states and 94 of the 100 largest markets, but it's dropping in some major cities, like San Jose, San Francisco, Seattle, Houston, Portland, Oregon, and Baton Rouge, Louisiana
Today's more conservative borrowers have not been taking advantage of their home equity. Just $54 billion was withdrawn in the first quarter of this year, which was the lowest volume in four years. Less than 1% of available equity was withdrawn.
During the last housing boom, in the early 2000's, borrowers were using their homes like ATM's. That resulted in negative equity positions when home values crashed, leading to the worst foreclosure crisis in history. Borrowers today appear to be much more reluctant to leave themselves without a cushion, remembering that home values can go down as easily as they can go up.