Mortgage refinancing soars as homeowners take advantage of low interest rates

Mortgage refinancing soars as homeowners take advantage of low interest rates
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Applications for mortgage refinance loans have increased sharply as American homeowners look to capitalize on near record low mortgage rates.

According to the latest Mortgage Bankers Association (MBA) data, refinancing activity for the week ending June 5 leapt 11% from the previous week and was a staggering 80% higher than the same week one year ago. With lockdowns gradually easing across various states, applications for loans to purchase a home also reached their highest level since January, rising 5% week-over-week and by 13% compared with a year ago.

"Fueled again by low mortgage rates, pent-up demand from earlier this spring, and states reopening across the country, purchase mortgage applications and refinances both increased,” said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting.

Mortgage rates remain low

The surge in activity comes shortly after the best refinance mortgage companies began to edge mortgage rates higher following last week’s better-than-expected job figures. However, the new MBA data suggests borrowing costs may have stabilized again, with the average interest rate for 30-year fixed-rate mortgages climbing by the smallest possible margin to 3.38% from 3.37% the week before for conforming loans with a 20% down payment. 

Average rates on a 15-year fixed-rate mortgage on the same basis decreased to 2.83% from 2.85%, while the typical cost of 30-year loans backed by the FHA dropped to 3.38% from 3.46%. Jumbo loans with a 30-year term saw rates rise to 3.70% from 3.66%. 

Lenders becoming more choosy

The surge in refinance mortgage applications comes after it was revealed homeowners could save up to $52,000 over the lifetime of a mortgage by swapping their existing home loan for a cheaper new one. 

Mortgage refinancing soars as homeowners take advantage of low interest rates

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One potential stumbling block, however, is the tighter lending standards being imposed by the best mortgage lenders in response to soaring unemployment rates and wider risks in the economy. According to separate MBA analysis, the availability of mortgage credit decreased in May to its lowest level since June 2014, impacting in particular the options available to first-time buyers and those with lower credit scores. While the index in relation to Government loans slipped just 0.8% lower, conventional loans decreased by 5.7%. Within the latter, the conforming loan index contracted by 6.9% and the jumbo index decreased by 4.4%. 

"There was a reduction in supply across all loan types, driven by further pullback in investors' appetites for loan programs with low credit scores and high loan-to-values,” said Joel Kan. “Credit tightening was observed at both ends of the market, with less availability of low downpayment programs designed for first-time homebuyers, as well as for conforming and non-conforming jumbo loans."

What should mortgage borrowers do?

American homeowners currently undecided whether to refinance should probably deliberate no more. Mortgage rates remain near historic lows and mortgage companies only seem likely to become more cautious in who they lend to. 

Thinking of refinancing?

Find out whether the best refinance mortgage lenders could help you secure a cheaper home loan. 

That said, you still need to do the math to make sure that refinancing your mortgage makes financial sense. Find the paperwork for your current mortgage and check for fees that might have to be paid if you leave. There are also likely to be costs associated with arranging a refinance mortgage which need to be taken into account too. 

When it comes to applying for a refinance mortgage, make sure you have as much of the paperwork you will likely need to hand. Among a list of requirements, lenders will want to see proof of income, tax returns, bank statement, a rundown of your debts, and identity forms. If lenders are being increasingly picky over who they lend to, it could also be worth taking the time to check on your credit score and try to improve it if necessary.  

Tim Leonard

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.