Recent mortgage rate hikes have snuffed out the refinancing boom, signaling that the Fed’s interest rate hikes are starting to hit home. According to the latest quarterly report from the New York Fed on consumer debt, refinancing activity dropped sharply. Originations of refi loans fell 15% to $424 billion in the first quarter of this year, down nearly 40% from the same period in 2021.
Refinancing boom ebbing as mortgage rates rise
Recent increases in mortgage rates have cooled the refinancing boom. While refinancing numbers have declined, they are still high compared to the last two years. Rising mortgage rates have also put first-time homebuyers at a disadvantage. With fewer homes available, buyer competition is spiking prices. Rising https://finanza.no/sok-forbrukslan/ make refinancing even more expensive. Rising home prices may also push existing homeowners to seek loan terms that are more favorable.
The low mortgage rates that helped spur the housing recovery after the Great Recession are not sustainable. While overall mortgage debt is rising, it has slowed. This is partly due to a rising home price, but many buyers need to borrow more than they had originally planned. Consumers are also comfortably managing their bills, with deep distress signals hovering at historically low levels. Six percent of consumers have accounts in collections. That’s much lower than double-digit rates after the Great Recession.
Subprime mortgages remain effectively non-existent
Subprime mortgages are home loans made to borrowers with sketchy credit histories. They were largely wiped out after the housing crash, and investors no longer wanted to invest in them. Now, subprime mortgages are returning under a new name: nonprime. Midsized lenders, such as Carrington Mortgage Services, are planning to offer nonprime mortgage loans to borrowers with a poor credit history, and then securitize these loans for sale to investors.
As mortgage rates rise, so do interest rates for subprime mortgages. Interest-only mortgages are one type of subprime mortgage, and typically have an initial term of five, seven, or 10 years. This type of loan requires no principal payments, and it is easy to refinance the loan when your income fluctuates. Interest-only mortgages are a smart option for people whose incomes fluctuate or whose income is uncertain.
Impact of Fed rate hikes on mortgage rates
The impact of Fed rate hikes on mortgage rates is mostly inconsequential for homebuyers, since the rates are based on personal credit scores and the type of loan. Nevertheless, experts agree that homebuyers may feel the effects of the Fed’s move. Home prices are reaching new highs and higher mortgage rates have dampened the demand for homes. But the Fed’s upcoming hike may not be as significant as feared.
The most recent increase in the federal funds rate came after the market had already priced in a 0.75% rate increase. The only other option was a 1.00% hike, but Fed speakers had already dismissed the idea two weeks ago. But, mortgage rates don’t directly reflect the decision of the Federal Reserve, as this is only an indirect impact and only one of the many forces at play. Therefore, mortgage rates may not move tomorrow, even if the Fed hikes its policy rates.