Why Home Refinance Loans Are Slipping

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Between 1978 and 1981, U.S. mortgage loan rates soared from around 8% to about 18%, the most dramatic increase in the past half-century. Mortgage rates to purchase or refinance a home today run right around 4.5%. So, why are applications for new mortgages slowing down and applications for refinancing positively tanking?

According to the Mortgage Bankers Association (MBA) report for the week ending April 6, home refinancing applications fell 2% week over week to 38.4% of all new mortgage loan applications. That’s the lowest percentage for home refinance applications since September 2008 and about half the peak rate of just a few years ago.

The MBA’s seasonally adjusted composite index on mortgage loans fell by 1.9% last week, and for the month of March mortgage applications for new home purchases dropped by 2.6% year over year.

According to a report in The Wall Street Journal, industry research group Inside Mortgage Finance reported that just 37% of all mortgage-origination loans last year were refinancings, the lowest total since 1995. The overall mortgage loan market dropped by 12% last year to $1.8 trillion, according to Inside Mortgage Finance.

One reason home refinancing loans have tanked is that most homeowners who wanted to refinance their home mortgages in order to lower their monthly payments already have done so. This category of borrower is typically the largest for mortgage loan refinancing, and rising interest rates have little appeal.

The kind of refinancing that has seen a burst of new activity is cash-out loans. Cashing out means taking out a new mortgage to replace a smaller existing mortgage and using the cash difference for some other purpose. In addition to taking out a new mortgage, homeowners can cash out with a home equity line of credit (HELOC) or a home equity loan. According to Freddie Mac data cited at MarketWatch, cash-out refinancings have reached their highest level since 2008.

A new obstacle to cashing out with a HELOC or a home equity loan is that the tax law changes enacted last December limit the amount of interest that can be deducted for these kinds of home loans.

According to the MBA, last week’s average mortgage loan rate for a conforming 30-year fixed-rate mortgage decreased from 4.69% to 4.66%. The rate for a jumbo 30-year fixed-rate mortgage decreased from 4.56% to 4.53%. The average interest rate for a 15-year fixed-rate mortgage dropped from 4.09% to 4.08%.

The contract interest rate for a 5/1 adjustable rate mortgage loan increased from 3.87% to 3.93%. Rates on a 30-year FHA-backed fixed-rate loan fell from 4.74% to 4.66%.