The mortgage market is undergoing a gradual transformation as it adjusts to a prolonged period of high interest rates. This transformation has seen a wave of rising mortgage rates upend the market environment, particularly as the pool of homeowners with mortgage rates below 5 percent is shrinking, according to the July ICE Mortgage Monitor report.
That means only 76% of homeowners have mortgages with interest rates below 5%, up from a much larger 90% just two years ago. According to the ICE study, starting in 2022, 4 million mortgage borrowers will have mortgages with interest rates above 6.5%, including 2 million with interest rates above 7%.
Many economists have been trying to predict when the so-called “golden handcuff” of ultra-low interest rates might snap, as many homeowners are hesitant to put their properties on the market or shoulder the burden of much higher mortgage rates. This latest data shows that the pool of people living off historically low interest rates is shrinking, albeit more slowly than some predicted.
And if interest rates fall at this point, this demographic of mortgage borrowers may be in a good position to refinance their mortgages to higher rates with minimal additional savings from slightly lower rates, said Andy Walden, vice president of research and analysis at ICE.
“This change is happening slowly as low-interest-rate borrowers sell their homes or refinance to extract smaller amounts of equity,” Walden said in a statement.
He continued: “The market as a whole is keenly aware of how rising interest rates are constraining lending volume. But from another angle, these same forces are also helping to slowly increase the population of people with high-interest mortgages who are actively waiting for the time when it makes sense to refinance. This will benefit both a growing number of homeowners and lenders.”
Refinancing Opportunities
As interest rates have risen gradually to just a fraction of historical levels, refinancing volumes have fallen sharply since 2022. With no incentive to make payments or save on interest, few homeowners can benefit from swapping their ultra-low mortgage rates for today's higher rates unless they tap into their own equity.
Still, refinancing activity is happening in some unexpected areas: VA loans, which have more streamlined refinancing options than traditional programs, for example, have seen their share of refinancing activity soar from less than 10% in 2023 to more than 30% in recent weeks, ICE found.
These refinancings allowed some VA borrowers to lower their interest rates by more than a percentage point, saving them an average of $230 a month in April, ICE reported.
According to ICE research, first quarter refinance retention rates rose to their highest level in the past 18 months, driven in part by VA refinance activity. What drove this increase? Among VA and FHA refinance borrowers, rate and term loan retention rates tripled, from 15% in 4Q23 to 46% in 1Q24.
In a separate study, the ICE Borrower Insights Survey confirmed that borrowers’ top priority is finding a lender offering the lowest possible interest rate, but the survey found that most borrowers (84%) only speak to one or two lenders before taking out a mortgage and are not likely to comparison shop for mortgages.
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