Making money cheaper to borrow helps potential buyers become actual homebuyers. Making money cheaper also helps homeowners save money on their mortgages. With average interest rates on a 30-year fixed rate mortgage now close to 4%, Black Knight, a mortgage data and analytics company, estimates that 4.9M borrowers could save money on their mortgages by refinancing and then reducing the interest rate on their home loan by three quarters of a percentage point.
A refinance on a $300,000 mortgage from 4.8% to 4.06% would save a borrower some $133/month. On a $600,000 loan, the savings would be twice as much or $267/month.
Black Knight researchers collectively commented, “While this (reduction in interest rates) will certainly impact buying power and housing demand as we (experience) the spring home buying season, it also has a massive impact on the refinance incentive almost overnight. After seeing refinance volumes drop significantly in late 2018, this is a game changer for both the housing and the refinance markets if rates hold at this level for an extended period of time.”
It is important, according to Black Knight, for homebuyers to factor in closing costs that would be amortized over the length of the loan and for homeowners planning to leave their homes sooner rather than later to realize that refinancing may not save them much money.
Ben Graboske, executive vice president of data and analytics with Black Knight, said, “The last time rates were at this level, cash-out withdrawals as a share of available equity were more than 25% above where they were in Q4 2018. This suggests we could see a noticeable rebound in homeowners tapping available equity via cash-out refinancings in the coming months given the increased rate incentive to do so.”
The flip side of lower interest rates as home prices deflate is that borrowers could lose home equity because hose seeking cash out refinancing would be tapping into a diminishing amount. After an equity-high of $6.06T in Q2 2018, tap-able equity has fallen by $348B and by $229B in Q4 2018 alone.
The major bottom line here, however, is that borrowers can save money through refinancing as rates come down and more borrowers are likely to be eligible in doing so.
Thanks to CNBC for research.