According to a recent CNBC article, applications for refinancing a mortgage went down by 1% during the first week of September, bringing the number of refinancing applications down to 83% of what they were at the same time last year. This is indicative of a major shift in the market that has made refinancing an inadvisable prospect for most current borrowers. It also points to a general weakness in the market that has caused home prices to go down for the first time in more than a decade.
What Does it Mean to Refinance Your Mortgage?
“Refinancing” is the process of renegotiating your mortgage with new payment terms, such as a different schedule for repayment or a different interest rate. When you choose to refinance your mortgage, you are effectively taking out a new mortgage to buy out your old mortgage. This new mortgage will, in theory, have more favorable terms compared to the old mortgage, making it easier to pay back.
What Are the Benefits of Refinancing?
Many people choose to refinance their mortgages as a way of making their mortgage more affordable. For example, people who borrow a mortgage at a time when interest rates are relatively high may choose to refinance under lower interest rates, meaning they pay back less money on their mortgage payments. They may also choose to renegotiate the terms of their mortgage to be more favorable, such as changing an adjustable-rate mortgage to a fixed-rate mortgage, or by extending a 15-year term of repayment to a 30-year term.
Why Are People Not Refinancing?
Several factors are contributing to the decline in applications for refinancing. One of the biggest issues is that interest rates have gone up significantly over the past few months, from 3.22% for a 30-year fixed rate mortgage in March to 5.94% in the first week of September. Another issue is declining home prices, which have discouraged mortgage applications more generally, and have made people hesitant about refinancing in expensive properties with declining equity.
What Does This Mean For the Market?
The drop in refinancing is another sign that the real estate market is cooling down, after nearly three years of rising home prices. People simply do not want to put their money into properties whose value is likely to go down over time, especially if it means they will wind up paying more money on their homes due to higher interest rates. However, this makes the market especially appealing for buyers, who are beginning to see the prices of homes drop to a point where they can become more affordable.
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