Is the era of mortgage refinance over?

Posted by  on Jul 21, 2013

Last month, mortgage rates rose above 4 percent for the first time since October of 2011. Though homeowners have gotten accustomed to having regular opportunities to refinance in recent years, history suggests it may be a long time before an attractive opportunity to reduce mortgage rates occurs again. While this will have a dampening effect on the mortgage refinance market, it won't completely spell the end of refinancing.

A long dry spell coming?

Mortgage rates move up and down in cycles, but some cycles are longer than others. For example, from April of 1975 to April of 1980, there was a five-year period in which there was never a peak-to-trough drop of 1 percent or more in 30-year mortgage rates. That means few people were able to find refinance rates worth switching to.

Even with their recent rise, mortgage rates are still very low, and coming off such a sustained downward trend, that it may be a similarly long time before they next drop significantly. Since 30-year rates were never below 4 percent before, people who got mortgages at those levels may never see an opportunity to save money by refinancing -- though they should count themselves fortunate to have gotten such a low rate in the first place.

Still some life in refinancing

Even without the opportunity to capture significantly lower refinancing rates, don't expect the refinancing market to dry up completely. People may continue to refinance for any of the following reasons:

  1. To reduce monthly payments. Stretching out the time remaining on a loan is a remedy available to homeowners struggling to make their monthly payments.
  2. To shorten the mortgage term. Homeowners who find they can easily afford their monthly payments may elect to reduce their total interest expense by shortening their loans.
  3. To access home equity. Cash-out refinancing allows homeowners to restructure terms and tap into equity at the same time.
  4. To switch between adjustable- and fixed-rate mortgages. There are tactical reasons for each of these loan types, and homeowners may change tactics to suit the market and their personal situations.

For potential home buyers over the next few years, the silver lining to higher rates is that with less refinancing business available, mortgage lenders might become a little more eager to make new purchase loans.

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