Ultra-low mortgage rates have sparked a refinance boom.
During the eight month period which began last November, average 30-year mortgage rates persisted in the 3s and 15-year mortgage rates were often in the 2s.
More refinances closed from January-March this year than during any quarter since 2013.
However, high refinance volume has come at a cost. With refinance volume climbing, many lenders find themselves unable to close loans as quickly as in months past.
According to Ellie Mae, it now takes 48 days, on average, for borrowers to go from application to closing. It's the slowest pace in two years and it's having a negative effect on U.S. mortgage rates.
A mortgage refinance is a financial transaction in which an existing mortgage is fully "paid off" using funds from a new mortgage. The old refinance is "satisfied" and it's replaced with a new one.
Refinances come in three varieties.
The first type of refinance is the cash-out refinance. With a cash-out refinance, the homeowner's new mortgage size is increased to exceed the former mortgage's size by five percent or more.
Cash-out refinances are most often used to fund home improvement projects, reduce credit card debt; and, payoff student loans.
The second type of refinance is a cash-in refinance.
With a cash-in refinance, the homeowner brings cash to its closing in order to "pay down" the existing loan. A loan is considered to be cash-in if the homeowner's mortgage is reduced by five percent or more.
The third type of refinance, though, is the most common. It's call the rate-and-term refinance.
With a rate-and-term refinance, the homeowner lowers its mortgage rate, changes its loan's term, or does both.
Examples of rate-and-term refinances include a homeowner refinancing from a five percent mortgage rate to a 4% mortgage rate, with no "cash out" taken; and a homeowner switching from a 30-year fixed rate mortgage to a 15-year one.
It's taking longer for lenders to close on a refinance.
According to mortgage software provider Ellie Mae, in April, the typical refinance needed 48 days to close. This is a 12-day increase from just two months prior; and the longest it's taken to close on loans since July 2013.
There are a few reasons behind slowdown and the first is low mortgage rates.
As mortgage rates have dropped, refinance activity has climbed. Freddie Mac estimates that the homeowners who refinanced in 2014 will save $5 billion, collectively, on the first 12 mortgage payments of their newly-refinanced loan.
For 2015, homeowners are expected to save even more.
Sure, today's mortgage rates are higher as compared to last quarter but rates are still one half-percentage point below their levels from the start of last year. Millions of U.S. homeowners continue to be "in the money" to refinance and to lock-in big savings.
It's no wonder refinance volume was its highest in seven quarters last quarter.
Another reason why lenders are moving slower is that their pipelines are clogged with purchases.
Low rates and rising rents are changing the equation of Buy vs. Rent. In many U.S. cities, it's now less expensive to buy a home than to rent one. Plus, there are a multitude of low- and no-downpayment mortgage loans for buyers not putting twenty percent down.
In April, more homes went under contract than during any month since 2009.
Lenders are ill-equipped for the volume.
Based on data from the Bureau of Labor Statistics, the mortgage industry pared staff between 2006-2015, dropping from 505,000 to 300,000. Today's mortgage lenders employ fewer people, but process far more applications. And, each of those applications is subject to time-consuming compliance and monitoring -- steps which weren't required even ten years ago.
Today's lenders are attempting to do more with less, and when mortgage rates drop, the system can strain.
Lenders now require 48 days, on average, to close a refinance -- up twelve days from just two months ago.
For consumers, the jump amounts to bad news. This is because mortgage rates are often quoted for 15-day "windows". With each additional 15-day window, your quoted rate will rise.
Consider the weekly Freddie Mac mortgage rate survey, which lists average mortgage rates for the 30-year fixed, 15-year fixed, and 5-year ARM. Freddie Mac's rates are based on a survey of more than 100 banks nationwide, each of which quotes rates for 30-day delivery.
30 days, however, is too few to close a refinance in today's Refi Boom. Instead, then, lenders opt for 45-day or 60-day locks which, unfortunately for borrowers, carry higher overall costs.
Mortgage rates move approximately 12.5 basis points (0.125%) with each 15-day change :
With the average refinance now requiring 48 days, today's refinancing homeowners aren't getting the lowest available 30-day mortgage rate. They're getting an elevated 60-day mortgage rate instead.
The Refinance Boom has banks too busy to close on loans quickly.
Mortgage rates remain below their year-ago levels and, at today's rates, there are refinance opportunities for millions of U.S. homeowners. The typical refinancing household saves more than 30% annually. You may save even more.
Get a complimentary mortgage rate quote now. Rates are available online with no social security number required to get started and with no obligation to proceed.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2015 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)