Refinancing Overtakes Home Purchase Loans
With today’s mortgage rates dropping so low, refinance loans are smoking hot. In April, refinances accounted for nearly half of all loans closed by U.S. lenders, grabbing a 47% market share give or take. This is somewhat down from the last three months during which refinance loans overtook purchase ones, but demand for lower mortgage rates remains strong.
Savvy homeowners are grabbing the chance to reduce their monthly mortgage payment. Furthermore, lenders are approving more refinances than anyone can even remember. Ellie Mae reported, two-thirds of conventional refinance loans were approved in April; as were 50% of FHA refinance loans, and 55% of VA refinance loans.
Not since Ellie Mae started tracking such crucial data have the closing rates as a whole for refinance loans been so high.
Low Mortgage Rates Driving Refinance Loans
As compared to last year’s average, the market share of April’s refinances marks a 10-tick improvement. In 2014, the percent of closed refinance loans was just under forty percent.
There are two main catalysts behind this year’s surging refinance activity. The first spark for refinance loans is that the majority of U.S. home values have moved up steadily, greater than 30%, according to S&P Case-Shiller Index, from the bottom market which was set back in 2010. When home values rise, refinancing becomes easier for underwater homeowners by using loan programs such as HARP. Rising values also give homeowners with existing FHA loans the ability to cancel FHA MIP via refinancing. For homeowners with conventional loans, rising home values makes it much simpler to remove private mortgage insurance (PMI) from a home loan. Once loan-to-value (LTV) reaches 80%, a refinance can remove PMI permanently.
A second reason for this year’s refinance boom is that today’s mortgage rates are promising huge monthly savings to households opting to refinance. According to Freddie Mac, there are more than 1 million U.S. homeowners in the money for a refinance. Being “In the money” is defined as having a mortgage rate more than 150 basis points (1.50%) above today’s current rates; plus sufficient home equity to qualify.
The typical refinancing household saved more than 31% with a refinance last quarter, when mortgage rates averaged somewhere near the 3.75 percent mark.
Ellie Mae: Mortgage Approval Statistics
The April 2015 Ellie Mae Origination Insight Report provides a great snapshot of today’s typical loan approval rate, along with the profile of today’s mortgage applicants.
As one example, buyers with FHA loans are making a 5% down payment, on average; and their credit scores are slightly higher as compared to last year. Today’s FHA buyers carries an average FICO of 686 — two points higher than last year’s average. This is interesting because lenders have aggressively lowered their minimum FHA credit score requirements, with some lenders now allowing FICO scores as low as 580 and sometimes lower in order to get approved; and the FHA’s Back to Work program gives FHA borrowers access to mortgages just 12 months after a bankruptcy, foreclosure or short sale.
Also noteworthy in the April report was data showing that more mortgage applications getting approved as compared to recent years — both on the purchase and refinance side. This data point runs counter to the common refrain that “mortgages are tough to get”. Statistically, home loans and refi’s are easier to get than they’ve been in quite some time.
Lenders are loosening requirements and criteria, just in time for today’s super-low rates. It’s almost as if they are trying to make refinancing fun for everyone.