Mortgage Refinances Plunge 53% as Rates Near 2-Year High

Rising rates are making refinances less appealing for borrowers.

In 2020, when mortgage rates started plummeting, borrowers across the country rushed to refinance their home loans to reap savings and slash their monthly payments. Refinance activity then held strong in 2021 as mortgage rates climbed modestly but remained quite competitive.

But so far, 2022 has brought higher mortgage rates into the mix. And that includes refinance rates, which tend to be a notch higher than the rates borrowers can snag for new home purchases.

Right now, the average refinance rate for a 30-year mortgage is sitting at a little over 3.8%. Meanwhile, the average 15-year refinance rate is at just over 3%. Historically speaking, these are competitive numbers for refinance rates. But they may not be low enough to entice borrowers to swap their existing home loans for new ones.

Refinance volume is down

Last week, refinance application volume was 13% lower than it was the previous week, according to the Mortgage Bankers Association. But compared to the same time period a year ago, it was down a more significant 53%.

Incidentally, purchase mortgage applications fell, too. They were down 2% from the previous week and 11% on a year-over-year basis.

Does refinancing no longer make sense?

For some borrowers, there's still an opportunity to save money by refinancing. But for many borrowers, that window may have already passed.

If you're a homeowner and you already have a low interest rate on your mortgage, then refinancing may not be worth your while. As a general rule, you should aim to shave about one percentage point off of your mortgage's interest rate at a minimum for refinancing to make financial sense. That's because you'll spend money in the course of refinancing.

Just as you'll be charged closing costs when you sign a mortgage to purchase a home, closing costs also apply when you refinance. As is the case with a purchase mortgage, closing costs for refinancing can be substantial, amounting to as much as 5% of your loan amount. Since you might spend a lot of money to refinance a mortgage, you'll need to make sure you're getting enough monthly savings out of the deal.

Let's say you're able to refinance your home loan and lower your monthly mortgage payments by $80 in the process. If you're charged $5,000 in closing costs, it will take you over five years to break even and start reaping savings. But a lot can happen in five years. You may decide to move, upsize, or downsize. In that case, refinancing could end up being a risky prospect from a savings perspective.

Will mortgage rates continue to rise?

We don't know exactly what 2022 has in store for mortgage rates, but it's fair to assume they could continue to climb gradually after sitting at or near record lows for so many months. While regular mortgage rates may still be low enough to attract buyers, it's getting harder to make the case for refinancing an existing loan. It wouldn't be surprising to see refinance volume continue to decline in 2022.