With borrowers sitting on low rates, refi will only be able to grow so much

The average 30-year fixed mortgage rate, as tracked by Mortgage News Daily, came in at 6.15% today, well below this year’s peak of 7.52% in May.

While this drop in mortgage rates hasn’t yet translated into a spike in mortgage purchase applications, it has coincided with a jump in refinance activity, as some borrowers who secured rates of 7.0% or 8.0% over the past 24 months are taking advantage of the recent rate dip for some relief.

Although this isn’t a huge refi jump, it is a bounce off the multi-decade lows hit during the mortgage rate shock. And after a tough few years, loan officers will take whatever increase they can get.

Heading forward, the mortgage industry's concern is that even if mortgage rates fall to a 5-handle, it might not be enough to trigger a long, sustained refi boom.

The reason?

Among U.S. homeowners who have a mortgage, 76% have an interest rate below 5.0%. In other words, the pool of borrowers who’d be attracted to a traditional refi is still pretty small.

Indeed, in Q1 2024, just 3.4 million borrowers had a mortgage rate above 6.5%, including 2.1 million who had a mortgage rate above 7.0%, according to Freddie Mac.

That’s a tiny number in a country with 86.2 million owner-occupied housing units.

The fact that traditional refinancing could be limited, combined with U.S. homeowners sitting on record levels of equity, has many analysts (including Conor Sen) thinking that the macro backdrop will spur growth in the home equity loans market, including HELOCs.

“As we look ahead, the next refi wave will not be a rate & term refi story as it was during the low-rate era of the pandemic, it will be the resurgence of home equity,” Jeff DerGurahian, chief investment officer and head economist at loanDepot, recently told ResiClub.

DerGurahian added that: “The home equity market has been relatively dormant since the 2008-2009 financial crisis, and it’s a shame there isn’t more attention on it now. As homeowners are being squeezed by inflation and high-interest debt, a home equity loan can be a very smart and useful financial tool that, when used wisely, can help them save a lot of money by lowering their cost of borrowing (especially compared to unsecured credit card borrowing) without sacrificing their current mortgage rate.”

Are they right?

Well, after peaking in 2009 and declining for years, HELOCs quietly bottomed out in Q1 2022. Now, HELOCs are on the rise again.

Later this week, ResiClub PRO members will get a deeper dive looking at home price changes for over 800 metro areas and 3,000 counties.