If you’re thinking about refinancing your home, you’re not alone. Refinancing made up a larger percentage of overall mortgage applications and helped drive overall mortgage applications higher. Reports from Fox Business and CNBC are linking the rise to a strong jobs market.
As 30-year fixed mortgage rates remain at historic lows less than 4%, mortgage application activity finished 3.8% higher last week than the week before. Compared to the same week last year it’s 63% higher.
Looking at the refinancing data on its own, those applications moved 9% than the previous week and finished 146% higher than the same week a year ago. Refinancing applications made up 62.4% of all the applications last week compared to 59% the week before.
Flipping over to home purchase data, those applications were down 0.4% last week but showed a 5% improvement over last year.
We need to consider two other pieces of the puzzle here. First, the 30-year fixed-rate mortgage was 98 basis points higher a year ago—4.95%. We also have unemployment down around 3.5% and a November jobs report that showed overall payroll gains at the time we’re writing this article.
What to Make of the Data?
Let’s say last year you bought a house and borrowed $250,000 over 30 years at a 4.75% interest rate. If nothing changes and you don’t make additional payments, you’ll pay $219,420.60 in interest.
A year later, we’re 98 basis points lower (0.98%) and you decide to refinance. You’ve paid off a whopping $3,857.69 in that first year. With your new interest rate at 3.77%, now you’re paying a total of $165,236.39 in interest—a savings of more than $54,000 in interest!
Since you reset your mortgage to 30 years again, we also need to consider the money you spent in the first year and take that away from your savings. Don’t forget about closing costs on your refinance as well. Still, it’s some $35,000 to $40,000 in savings over the life of the loan and your payment drops by about $160 per month.
That’s why a drop in the rate is so significant. When job security and stable or rising income are also present, those figures make refinancing look awfully attractive.
For short-term refinancers, it makes a lot of sense. But what about mortgages that have been in place for longer?
Those folks may be looking to reduce their rate and/or drop their term to 15 or 30 years. The other possibility is that they’re looking to cash out their equity. For some, it might be to purchase a big-ticket item. But for many, it’s a move that lets them refinance now and remodel or add on to make the house they’re in a good fit for their growing family.
And therein lies an opportunity for remodelers.
Good News For Banks, Mixed News for Builders
While an increase in mortgage applications is great news for banks, it’s a mixed bag for builders. Despite being an attractive time to buy based on rates, supply of affordable housing is low. That’s especially true for younger adults buying their first homes.
Builders can hardly keep up with demand in some parts of the country (good news). In our little corner of central Florida, developers are selling lots quickly. Local realtors tell us that anything under $200,000 that’s in reasonable shape doesn’t stay on the market long. If you’re looking for something under $150,000 that isn’t a fixer-upper, you can forget it.
Because there’s such a sense of urgency (even in our own office!) to purchase a home, builders are staying busy now but might see the client pool dry up when rates begin to rise again (bad news).
For now, our recommendation is to not ignore starter homes. It’s a segment of the market that has a ton of demand and very little supply. Those houses typically take less time to build, and you may see your profitability rise as you complete more projects in 2020. Unless rates go crazy, that part of the market will likely be able to handle an increase in rates without killing off demand better than other sectors.
