Refinance Demand Plunges 50% Year Over Year. These Are Some of the Reasons Why

Borrowers may be pulling back on refinancing for good reason.

Refinancing a mortgage is a great way to eke out monthly savings. By lowering the interest rate on your home loan, you can slash your housing costs and free up money for other things. And given that inflation is making everyday living costs so much more expensive, that's a smart thing to consider.

But these days, the demand for refinances isn't all that high. The Mortgage Bankers Association reports that for the week ending Jan. 7, refinance demand was 50% lower than it was a year prior. And while there are different factors that could be lending to that trend, here are a few likely causes.

1. Rates are higher

On a historical basis, mortgage rates are currently sitting at competitive levels. But they're already higher compared to where they were last year, and that may be spooking borrowers. This especially applies to those who already have relatively low rates on their existing loans.

Generally, your goal in refinancing should be to shave about 1 percentage point or more off of your loan's interest rate. The reason is you'll pay closing costs to swap an existing home loan for a new one, so you'll need to eke out enough savings to make those fees worthwhile. But the more refinance rates climb, the less enticing they'll be.

2. Borrowers' plans may be up in the air

Because you're required to pay closing costs to refinance, it's important to stay in your home long enough to come out ahead financially. Say you're charged $4,000 in closing costs for a new mortgage that shaves $200 off of your monthly payments. While that's a nice amount of money to save, it'll take 20 months to break even after paying your closing costs. If you're not sure you'll stay in your home that long, then refinancing becomes a risk.

Although the U.S. economy is fairly strong, we're in a generally precarious state right now due to inflation and the omicron surge. A lot of borrowers may be in a position where they're not rushing to refinance because their plans just aren't so firm.

3. A lot of people refinanced already

When mortgage rates started plunging in mid-2020, many people rushed to refinance. This recent decline in demand can also be explained by the fact a lot of borrowers have already gotten new home loans since the start of the pandemic, and therefore don't need to go through that process again.

Should you refinance?

If you've yet to refinance your mortgage, going that route could be a good idea. But before you do, ask yourself:

• How's my credit score? If it's not in great shape, you may not qualify for a competitive mortgage rate on a new loan.
• Do I have a low mortgage rate already? If so, the savings you reap by refinancing may be minimal or nonexistent when factoring in closing costs.
• Am I staying put for a while? If you're not certain, you should probably hold off on refinancing.

Refinancing could be a great way to save money on housing costs, and even though today's rates are higher than they've been recently, they're still relatively low. It's important to make sure getting a new mortgage is the right decision given the factors above.