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How Much is Left to Refinance?

Most Mortgages Have Rates Close to or Below Current Market Rates

Molly Boesel    |    Mortgage Performance

With Mortgage rates expected to rise this year[1] what will happen with refinancing? How much is left to refinance?

CoreLogic tracks the current interest rates on outstanding mortgages in its servicer-contributed database. The accompanying chart shows the share of outstanding mortgages by interest rate bucket for both the number of mortgages and the unpaid principal balance (UPB).

Because a refinance isn’t free, a simple rule of thumb is to add 100 basis points to the current market mortgage rate as the rate at which borrowers would have an incentive to refinance. For the week of May 12, 2016, Freddie Mac reported an average 30-year mortgage rate of 3.57 percent. Therefore the typical borrower would need to hold a mortgage rate of 4.57 percent or higher to make refinancing a money-saving option. According to the chart, most borrowers hold mortgages with rates up to 4.50 percent, with 62 percent of mortgages and 72 percent of UPB in this range. There are an additional 14 percent of borrowers and 13 percent of UPB with mortgage rates between 4.5 and 5.0 percent, and if mortgage rates were to increase by 50 basis points in 2016, these borrowers (about 5.5 million) will generally find refinancing unappealing. And, if interest rates were to increase by 100 bps, a total of 21 percent (over 8 million) are unlikely to refinance. If mortgage rates rise as predicted, we will certainly see refinancing volumes fall in 2016. Note there is a small share of outstanding mortgages with interest rates of about 300 basis points or more above the current market rate. There are many reasons borrowers with high interest rates don’t refinance, including a low UPB and poor credit.

A drop in refinancing does not mean that borrowers won’t be taking out new loans. Even though at least 62 percent of borrowers most likely don’t want to refinance out of their low mortgage rates, they still might want to tap into their equity to pay for remodeling, education expenses, or debt consolidation. Instead of extracting equity through a cash-out through refinance, they may instead take out a home equity loan. In a February 2016 white paper[2], CoreLogic shows that home equity lending has made a comeback in recent years.