Earlier this year, the prevailing thought was that rates were going to edge up bit by bit, effectively creating tumbleweeds in the refinance pipeline and causing mortgage originators to shift their attention to new purchase business.
But refinances are far from dead. Refinance activity is at its highest point in years, and originators are finding themselves inundated with refi business both solicited and unsolicited. It’s all good mortgage news, but consumers aren’t always aware of how it will affect their bottom line.
“It’s not as dramatic of an effect that I think that consumers think it is; it depends,” said Dianna Gibson, an originator with Motto Mortgage Summit in Colorado. She likes to use graphs and other tools to show her clients what has happened historically when the Fed has lowered the prime rate, and how it has affected long term rates such as mortgage rates.
The first week in August saw mortgage refinancing volume jump nearly 37% to a three-year high, according to a Mortgage Bankers Association Report. The latest edition of the Mortgage Bankers Association Refinance Index is up 180% compared to the same period last year, and the average contract rate on a 30-year fixed mortgage has declined to 3.9%, the lowest since November 2016.
Dianne Crosby, a top producer with Guaranteed Rate in Berkeley, California, said that anyone with an interest rate over 4% could benefit from a refinance, but she has to explain that the longer they’re willing to stay, the greater the benefit will be to them.
“I don't think that this recent reduction in rate is a huge event, because it's happened before, and there are buyers who, when rates go down, say they’ll wait because they might go down even more. When you see news about [a possible] recession, then buyers are asking me, ‘Will home prices go down in the spring? Should I wait?’ And so we have to understand that these news bytes deserve explanation by us when we're talking with our clients.”
Borrowers are noticing all the buzz about refinances, and sometimes the struggle is explaining that what they’re seeing doesn’t necessarily pertain to their specific situation. Another, more welcome, struggle is that borrowers will get to mortgage originators before originators have the chance to reach out to them.
“If I don't reach them first, what I'm learning is that they are hearing so much about rates going down that they're reaching out to institutions themselves,” Crosby said. “I know that if I don't reach out to a client, and for whatever reason, they don't think to reach out to me (and some clients don't realize I do refis, because I helped them purchase their home), if I don't reach out, I might lose them because there's so much interest in exploring options for refinance. So it's really important to be reaching out to clients right now.”
Gibson is trying to juggle her own outreach to past clients with those who are turning to her with questions about refinancing. On a daily basis, she says that she sends voice texts to past clients offering a complimentary check not only with them, but with their friends and family as well.
Some people have no idea that interest rates have dipped, and/or they don’t pay close attention to their mortgage statements and are thrilled when someone shows them how can improve their financial outlook. There are also differences in new homebuyer/current homeowner behavior that can impact qualifications.
“When people have it in their head that they want to buy a home, they're on their best behavior. They're not getting new debt, they're being mindful of their credit, they're saving their pennies. Whereas they buy the house, and then they go to refinance a year later, they've gone and bought a bunch of new furniture, and they've racked up their debt. So what I find a lot of times is, it is harder to qualify people a year later on a refi,” Gibson said. “Not always, but people's spending habits kind of get a little bit looser after they actually get into the home.”
FHA and other government loans are where there’s “a ton” of revenue streamline refinances, but Gibson says that purchase is where people can benefit the most from lowered rates.
“For homebuyers who purchased in Q4 of 2018, this will provide an excellent opportunity to refinance,” said Ward Morrison, president of Motto Franchising, LLC. “Additionally, the anticipated lower mortgage rates will offer late summer and early fall homebuyers the opportunity to lock in a low rate, and potentially help more families secure their dreams of home ownership.”
The story for new homebuyers, however, is mixed. Although the lowered interest rates are further increasing demand and encouraging buyers to lock in at favorable rates, applications for purchase mortgages haven’t really changed all that much. A low rate won’t get anyone very far if there isn’t a property to purchase, or if home prices of available properties are beyond their reach.
Gibson says that listing agents have started to contact her about potential buyers, and even then, sometimes they’ll go with another candidate.
“It's definitely a tough market out there if you're wanting to buy,” Gibson said.
The lowered rate is making a difference for some buyers, though, including those who are now able to qualify for the home that they want without needing to buy down the rate. Crosby said that this is a wonderful opportunity for originators to reach out to new homebuyers who they haven’t contacted in a while to let them know that they may be able to qualify for a little bit more or that things may be more affordable for them at their target price range.
But in those areas where the increased demand is fueling the rise of home prices, thereby pricing some people out of the market anyway, both Gibson and Crosby say that it’s all part of the cycle.
“At the end of the day, it's kind of a wash,” Gibson said. “We've got all of these people pre-qualified but the inventory isn't really supporting it right now.”