Homeowners Rush to Refinance as Mortgage Rates Dip Slightly

Homeowners, hungry for relief after two years of elevated housing costs, seized on the recent mortgage rate dip.

The 30-year fixed rate fell by just 0.3 percentage points to 6.26 percent over the three weeks ending on Sept. 17, yet refinancing activity in that span spiked 80 percent, according to data from the Mortgage Bankers Association reported by the Wall Street Journal. Borrowers were lured in by the lowest average mortgage level in almost a year.

That surge in activity didn’t last. When rates nudged higher again, refinancing applications quickly fell back, underscoring how jittery and rate-sensitive borrowers have become.

Most of the action is coming from homeowners who purchased in the past three years, trying to trim monthly payments after securing a rate near record highs. Ninety percent of all rate-and-term refinancings in the second quarter came from loans originated in 2023 or 2024, according to ICE Mortgage Technology data.

For these homeowners, the payoff from even a modest rate cut is significant. ICE’s Andy Walden said average debt-to-income ratios for second-quarter refinancers fell to 34 percent, their lowest since early 2022. That easing of mortgage costs gives households a bit more breathing room and could boost consumer spending power on the back of the Federal Reserve’s promised interest rate cuts.

There’s still a massive untapped pool of borrowers who could benefit from further declines. At present levels, 3.1 million homeowners could lower their rate by at least 0.75 percentage points and save nearly $400 a month as a result, according to ICE. If rates slip to 6 percent, that number nearly doubles to 5.9 million loans representing $1.5 trillion in unpaid balances.

Not everyone is chasing cheaper debt. Many homeowners with sub-5 percent pandemic-era mortgages have little incentive to refinance.

But some are opting for cash-out refis despite higher rates, tapping swollen equity to extract an average of $94,000 even as their new loans cost 1.45 percentage points more and $590 extra each month. With home-equity credit lines offering less favorable tax treatment, that trade-off is finding takers.

— Holden Walter-Warner