With interest rates remaining low, property values stabilizing, in many areas increasing, and new mortgage products, many current homeowners are again refinancing their loans.
A recent Freddie Mac report reveals that in 2014 a combination of all who refinanced, the savings will net approximately $5 billion in interest over the next 12 months. This includes those who refinanced under HARP (Refinances). This presents another of those good news; bad news scenarios.
In refinancing their homes, these homeowners have restructured their debt to make the mortgage payment a little more affordable, while is some cases drawing equity for payment of other debts, and/or realizing some additional spendable cash. This helps the economy grow. The old adage is: “The better the economy, the better it is for everyone.” Right?
However, by refinancing, most of these homeowners remove themselves from the home selling and home buying process. In doing so, there are fewer homes on the market for new, first time home buyers and fewer homes for move up buyers.
Fewer homes on the market, can influence an increase in the value of those up for sale. This is good for those who are selling, but bad for those are buying. This is especially true for those first time home buyers who we are encouraging to jump into the housing market. Fewer homes for sale, at higher prices, is not a good formula for first home buyers already strapped for cash, who are having difficulty in qualifying for a mortgage under the current lending environment.
You might think, “Well, if home prices are increasing, those who refinanced may be in a position to sell their home at a higher price and use the money to buy a new home.” Problem solved…not quite. Remember the homes these consumers will be buying are also increasing in price. So, the net difference between what they get when they sell and what they need to pay to move up remains the same. Many will just stay where they are now that they have a little breathing room between their income and the new refinanced debt.
It’s a balancing act. There is new opportunity for refinances with the low rates and the FHA reduced annual MI premium. There are also new opportunities for purchase financing with the higher LTVs, some easing of credit guidelines and the same low rates and FHA reduction in premium.
For now, this is good for lenders. If done right, with prudent underwriting, lenders may be in a position to make 2015 a very good year. In doing so, the economy will improve, interest rates will rise, making it a little more difficult to refinance.
I’m no fortune teller, but I believe the future lies in the purchase market.