The average interest rate on a 30 year fixed interest mortgage loan of at least $484,000 recently dipped below 4% for the first time in nearly 3 years. More precisely, the average interest rate has dropped to 3.93% as of last week. The rate is even lower for mortgages of a larger size and for 15 year mortgages. This drop has sparked a veritable wave of refinance loans as home owners seek to capitalize on this development. In the span of a single week, this decline sparked a 37% increase in the number of refinance loans as compared with the previous week. However, even refinance loans have shot up in response, the same cannot be said be home purchases. Purchases only increased by 2% during the same time frame (week to week).
A number of important factors may be contributing to this wave of refinance loans, just as other factors may be contributing to the relative lack of purchases. For one thing, the supply of homes continues to be relatively limited, and so home owners who may be potentially interested in selling and re-buying don’t have enough options. And, even if they lack the opportunity to buy, they still want to place themselves in the best possible financial situation, and so they’re jumping to take advantage of the low rate. Also, wages haven’t kept pace with rising home prices, and so there simply aren’t enough buyers in the market to push purchases anywhere close to refinances.
Those who refinanced their mortgage loans will likely end up saving a great deal of money in the long run. On a $400,000 mortgage loan, for instance, the difference between an interest rate of 3.93% and 4.8% means roughly a savings of $200 per month. If you carry that savings throughout the remaining life of a loan, you could be looking at a net benefit of many thousands of dollars. In a future article, we will get further into the nitty gritty of why lowered rates haven’t translated into more purchases. But for now it’s interesting to observe this short-term response to the drop in rates.
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