CURRENT MORTGAGE RATES “IN THE MONEY” FOR MILLIONS
Current mortgage rates are at their lowest levels of 2014, and at a 15-month best. Along with rising home values, it’s an excellent time to buy a home or refinance one.
Recent data shows that the number of home buyers greatly outnumbers existing homeowners looking to save money via refinance. It’s a strange observation considering that the typical refinancing household saved close to 30% via refinance last quarter.
At today’s mortgage rates, millions of U.S. homeowners remain “in the money” to refinance. Yet, purchase activity will likely outpace refinancing through the end of 2014 and into 2015.
Rents are rising faster than home prices, shifting the math of “Buy vs Rent”.
REFINANCE TO CANCEL FHA MIP, SAVE 30%, OR OTHER
Purchase mortgage closings market share two percentage points in July as compared to the month prior, according to data from mortgage origination software provider Ellie Mae.
July’s 67% market share marks a 14-percentage point increase from one year ago and the highest ratio of purchases-to-refinances since Ellie Mae began tracking such data in 2011.
There are a few reasons why purchases now outnumber refinances 2-to-1.
The first reason is that U.S. home prices continue to climb slowly and steadily. Home values are up more than 20 percent since 2012 in many U.S. cities, including San Francisco, Los Angeles and Las Vegas; and multiple-offer situations are common.
With 40% of homes selling within 30 days of listing, active buyers have learned that the housing market waits for no one.
A second reason why purchases are growing market share is that many U.S. homeowners are unaware of their opportunity to refinance; or don’t believe it.
According to Freddie Mac’s weekly mortgage rate survey, 30-year mortgage rates have averaged less than 4.20% for more than 100 days; and, many mortgage lenders now quote rates in the 3s.
Millions of U.S. homeowners remain refinance-eligible, including more than 667,000 which could use the Home Affordable Refinance Program (HARP), but have not. The government has gone so far as to send FHFA Director Mel Watt on a city-by-city tour to promote the program; and to list eligible HARP loan households by state on its website.
The typical HARP homeowner saves more than 30% via a refinance.
Furthermore, with mortgage rates low, current FHA homeowners and VA-backed homeowners are eligible to refinance via each agency’s respective streamlined refinance program.
Many FHA homeowners have used the opportunity to cancel FHA MIP payments via a refinance to a conventional loan which carries a smaller (or no) mortgage insurance requirement.
85% OF FHA LOANS ARE PURCHASE MORTGAGES
Ellie Mae reports that 67% of July’s mortgage transactions were used to purchase a home. This is a reversal from February of last year when refinance activity accounted for two-thirds of all loans.
Falling mortgage rates and the changing math of Rent vs Buy are among the reasons why the share of purchase loans has soared. However, among certain loan type, the spread between purchase and refinance activity is even more stark.
For example, among FHA loan closings, 85 percent of loans were used to purchase a home. Just fifteen percent of FHA loans were used for a refinance.
One reason why FHA refinances trail purchases is because FHA purchase loans are among the most accessible loans to first-time home buyers.
Requiring a downpayment of 3.5% and minimum FICO scores as low as 580, FHA loans can appeal to renters looking for a stepping-stone into homeownership; or move-up home buyers with little downpayment to use on a new home.
A second reason why FHA refinances lag purchase loans is that the Federal Housing Administration’s flagship refinance program — the FHA Streamline Refinance — requires that homeowners save at least 5 percent on their payment in order to qualify.
Only recently have today’s low rates made that possible. The balance among FHA purchase and refinance loans is expected to shift later this year.
The difference in VA loans for purchase and refinance was similarly stark. 73% of closed VA loans in July were used to purchase a home versus twenty-seven percent used to refinance one.
The VA loan program also requires a certain minimum savings in order to use its refinance program — the Interest Rate Reduction Refinance Loan (IRRRL). With mortgage rates at their best levels of the year, VA refinances are expected to receive a boost later this year.