A recent decline in mortgage interest rates has led to a sudden spike in refinancing, according to the Mortgage Bankers Association. This dramatic increase in people seeking to refinance their mortgages may signal the end to the Federal Reserve’s efforts to combat inflation through interest rate hikes. However, overall demand for refinancing remains low compared to previous years, indicating that many homeowners are not ready to get excited about the real estate market just yet.
Decline in Interest Rates Leads to Refinancing Growth
The mortgage interest rate for 30-year fixed interest mortgages with conforming loan balances fell from 7.37 to 7.17% during the first week of December, the lowest they have been since August. As a result, applications for mortgage refinancing spiked by about 14%, rising to about 10% higher than they were at the same time last year. Applications for a new mortgage fell by 0.3%, however, indicating that people are not ready to invest in new properties just yet.
Fed Puts Halt to Interest Rate Hikes
A significant reason for this decline in the mortgage interest rate is that the Federal Reserve (commonly referred to as the Fed) seems to have backed off its recent anti-inflation policies. For more than a year and a half, the Fed has been gradually raising interest rates in the hopes of combating higher-than-average inflation. With the Fed backing off the policy, mortgage interest rates declined, spurring this burst of refinancing.
Homeowners Still Cautious About Refinancing
That being said, the actual number of people looking to refinance their mortgages remains relatively low compared to previous years. In particular, 2021 saw a burst of people applying for refinancing due to then-record low interest rates. While interest rates declining has spurred some to look to refinance their mortgages, it will likely not return to prior highs until it reaches much lower levels, with some citing 5.5% as a key benchmark.
The Future of the Market
For now, people seem cautiously optimistic about the future of the real estate market, now that the Fed seems to have halted its interest rate hikes. However, this may change if inflation begins to rise once more and it determines further measures are needed to fight it. If interest rates are allowed to decline somewhat, however, then perhaps more people will once again seek out refinancing, or even consider purchasing new homes.
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