Mortgage Applications Could Drop 33% in 2022

High home prices and rising mortgage rates could cause a decline in mortgage demand.

Mortgage lenders have been busy over the past year and change. That's because mortgage rates have been sitting at competitive levels since last summer. As such, new buyers have been clamoring to purchase homes, while existing borrowers have been taking advantage of low rates by refinancing their mortgages.

Things could change for the mortgage industry in 2022. In fact, the Mortgage Bankers Association (MBA) predicts that between new purchase mortgages and refinances, total mortgage origination volume will fall 33% next year compared to this year.

The reason largely boils down to rising mortgage rates. The MBA estimates the average rate for a 30-year fixed loan will reach 4% next year. That will, in turn, cause a 62% decline in refinance activity, which could drive overall loan origination volume down despite a potential uptick in purchase activity.

Should you plan to buy a home in 2022?

Right now, the housing market is still starved for inventory, and that's driven home prices upward.

If that trend continues into 2022, then inflated home values may serve as a reason to not buy a home. But that should have more of an impact than rising mortgage rates.

Even though a 4% rate on a 30-year fixed loan is higher than what we've seen since last summer, it's still a competitive rate from a historical standpoint. Right now, the average rate for the 30-year loan is hovering between 3.2% and 3.3%.

While that rate could climb over time, it's unlikely we'll see it reach 4% at the start of 2022. In fact, the 30-year loan may not reach the 4% mark until much later in the year, so borrowers who purchase homes during the first half of 2022 may be able to secure a better deal on a mortgage.

Should you refinance in 2022?

Right now, refinance rates are sitting just a notch above purchase mortgage rates. If you're interested in refinancing an existing home loan, you may want to move forward with those plans sooner rather than later.

It's one thing for new home buyers to not jump on purchasing a home right now -- there aren't many properties to choose from and many are hoping home values will start to come down. But if you already own a home and have a mortgage, you might as well get the ball rolling on refinancing before rates begin to climb.

That said, refinancing isn't for everyone. It really only makes sense if you can lower the interest rate on your mortgage by about 1% or more, and plan to stay in your home long enough to benefit financially after paying closing costs.

Lenders charge fees to finalize a refinance, just as those fees apply to new purchase mortgages. If you're looking at $5,000 in refinancing fees and stand to lower your monthly payments by $250 in the process, you'll need to make sure you intend to stay in your home for more than 20 months. Otherwise, you could lose money by refinancing.

Whether mortgage applications actually drop in 2022 is yet to be determined. It may end up being the case that next year is a great time to buy a home as well as refinance a mortgage. But if you're considering the latter, you may want to act quickly in light of the fact that mortgage rates are expected to rise.