As mortgage rates drop, millions of U.S. homeowners make this mistake
Despite mortgage rates falling to their lowest level in months, fewer Americans are applying to finance a home purchase and refinance existing loans.
The decrease in the supply of properties for sale and soaring house prices could be what is holding back mortgage applications from home buyers.
But experts say millions of US homeowners – including low-income borrowers – are making a mistake by not refinancing because they still have the option to significantly reduce their monthly payments.
Mortgage Applications Slide
Overall, mortgage applications fell 2.5% last week, according to the Mortgage Bankers Association reported wednesday.
Demand for loans has plummeted, even as mortgage interest rates have fallen. The average rate on the popular 30-year fixed-rate mortgage fell for the third week in a row, to 3.17%, according to the MBA’s weekly survey. Rates have not been this low since early February.
Other surveys show that rates have fallen even more. Mortgage giant Freddie Mac said last week that the 30-year fixed-rate mortgage had fallen to 2.97% on average.
Still, home purchase requests were down 5% from the previous week, but were 34% higher than last year when the pandemic was just taking hold.
“The recent downturn in the buying market comes despite a strengthening economy and job market,” said Joel Kan, chief MBA forecaster. “Activity is still above last year’s levels, but accelerating home price growth and low inventories have resulted in lower purchase requests in four of the past five weeks.”
Meanwhile, mortgage refinancing applications for the week ending April 23 were down 1% from the previous week and 18% lower than a year ago.
The big mistake for millions of homeowners
“Even with a few weeks of lower rates, most borrowers have probably already refinanced,” Kan explains.
But many American mortgage lenders who have yet to refinance make a mistake by continuing to hold on. Some 13 million homeowners can still benefit substantially by swapping their loans for one of the advantageous mortgage rates, according to technology and data provider Black Knight.
The most qualified of the group – 1.5 million total borrowers, estimates Black Knight – could save at least $ 500 a month by refinancing. It is a good chunk of change to cover household expenses, pay off student loans, or invest in the stock market using a relatively low-stakes approach.
Good refi candidates have 30-year mortgages and at least 20% of equity accumulated in their home, says Black Knight. They also have credit scores of at least 720. If you haven’t seen your score lately, it’s easy to access your credit score online for free.
Black Knight says a refi is only worthwhile if you can reduce your current mortgage rate by at least three-quarters of a percentage point (0.75).
A new way to get a better rate on a refi
This summer, government-sponsored mortgage giants Fannie Mae and Freddie Mac will launch a new refi option offering reduced interest rates that could save low-income borrowers up to $ 250 per month.
Qualified borrowers must have a federally guaranteed mortgage and earn no more than 80% of their area’s median income, among other requirements, the Federal Housing Finance Agency, which regulates Freddie Mac and Fannie Mae, announced wednesday.
“Last year, refinancing increased, but more than 2 million low-income families did not take advantage of record mortgage rates to refinance,” said FHFA director Mark Calabria.
The recent drop in mortgage rates might not last longer as the U.S. economy continues to improve and COVID-19 vaccinations spread into the arms of more Americans. If you are considering refinancing, check the mortgage rates of at least five lenders to make sure you get the most savings.
If you don’t qualify for a refi, find other ways to save money, like reducing your home insurance when it comes time to renew. Get quotes from several insurers to make sure you get the coverage you need at the best price.