More People Refinanced Last Year Than During the 2003 Refinance Boom

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There were good reasons for last year's record number of refinances.

Mortgage refinances boomed in 2003. Mortgage interest rates had dropped more than 20% from 2001, which provided an unprecedented opportunity to save on home loan payments. As a result, the number of refinance loans skyrocketed from 2.5 million in 2000 to over 15 million in 2003.

Unsurprisingly, 2003's refinance activity set new records. And those records remained unbroken -- until now.

The New York Federal Reserve revealed mortgage originations hit $1.2 trillion in the fourth quarter of 2020. This includes both new loans and refinance loans. In nominal terms, this surpassed the volume of mortgage originations during the "historic refinance boom" in the third quarter of 2003.

Much of the increase in mortgage originations came from refinance loans in 2020. In fact, mortgage refinances accounted for the bulk of newly issued mortgage loans.

Current homeowners are best placed to take advantage of historic low rates. Those who don't already own homes have to contend with climbing home prices, which temper some of the benefits of declining interest costs. For those who already owned homes, however, there was typically no downside to refinancing. And, as rates fell to unprecedented low levels, homeowners could save considerable sums.

Here's what this historic boom could mean for consumers

A record number of homeowners refinancing might, at first glance, be cause for concern. That's because the 2003 refinancing frenzy directly contributed to the financial crisis in 2008. Homeowners borrowed too much and took out loans they didn't fully understand. They found themselves in real trouble when property values fell.

However, there are a few notable differences between refinancing in 2020 and 2003:

  • Unlike 2003, most of the people who refinanced last year had excellent credit. In 2003, just 28% of mortgage loans went to borrowers with excellent credit, while 17% of loans went to subprime borrowers. By contrast, around 70% of mortgage borrowers in 2020 had excellent credit. And the average credit score among people who obtained new mortgages last year was 786 (a record high).
  • Homeowners withdrew much more equity from their homes in 2003 compared with last year -- even without adjusting for inflation. Borrowers withdrew $182 billion in home equity last year. But the average amount homeowners took out was only around $6,700. This suggests most people took only enough cash to cover closing costs.

These figures indicate people who refinanced last year generally did so responsibly -- and should benefit from the considerable savings that could come from securing a new mortgage at a lower rate.

Far from having catastrophic financial effects, this could have a positive impact both on the homeowners who refinanced and on the economy as a whole. Those who freed up money in their monthly budgets can now use the funds for other things -- whether that's saving for the future or finally spending at restaurants and traveling again once the COVID-19 pandemic is behind us.

Mortgage rates still remain competitive

If you didn't cash in on the historic low rates by refinancing (or buying a new home), it's not too late. Mortgage refinance rates have climbed slightly in recent days, but they still remain competitive.

It's worth shopping around to compare refinance rates. If you can save on your monthly payment, you may want to apply for a loan and join the millions of Americans who drove refinancing activity to record highs.

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