Refinance activity contracted after reaching a two-year high in September 2024
Refinance demand fluctuates, and dramatic changes can occur in a matter of months. Just look at the difference in volumes between 2021 and 2023.
In 2021, historically low mortgage rates and significant home price appreciation sent aggregate origination volumes of refinance mortgages to the highest point in decades.
However, as interest rates began to rise, demand for refinance loans contracted. By 2023 refinancing volumes hit a low not seen since 2001 (Figure 1).
In the first ten months of 2021, total mortgage refinance volume exceeded $2.2 trillion. In contrast, during the same period in 2023, refinance volume plummeted to just $273 billion, marking the lowest level since 2001.
That said, refinance activity showed a slight rebound in the first ten months of 2024, rising to $347 billion.
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Mortgage Refinance Rates and Application Volumes
A closer look at refinancing trends reveals an inverse relationship between mortgage rates and refinance activity. For each dip in interest rates, there is a corresponding surge in homeowner refinancing.
Following months of record rates, a decline in mortgage rates began in October 2024. After hitting a 19-year peak of 7.6% in October, the average rate dropped to 6.1% by September. This was about 120 basis points lower than the same period in 2023.
This decrease in rates led to a sharp rise in refinance applications, which reached a two-year high in the last week of September (Figure 2). However, following the sharp spike in mortgage rates in October 2024, refinance activity contracted, although it remained higher than the previous year. Notably, mortgage rates are still almost 1% lower than the same period in 2023.
Is Now a Good Time to Refinance a Mortgage?
Most homeowners refinance to reduce their monthly mortgage payments with a lower interest rate. However, current high mortgage rates limit the number of homeowners who can benefit from refinancing. As of September 2024, most of the outstanding loans — around 80% — carry interest rates below 5%, a result of the low-rate environment in 2020 and 2021. Only about 12% of current loans have interest rates of 6% or higher, and many of these loans were originated in 2023 and 2024. Homeowners with these loans could only benefit from refinancing if rates fell below 6%.
Given that it is unlikely that mortgage rates will return to the historically low levels seen in 2020-2021, a refinancing boom seems improbable. Even just to make refinancing financially viable, the new mortgage rate would likely need to drop by at least 1%. It remains to be seen how low mortgage rates will go in 2025; however, under current rate conditions, it does not seem likely that there will be a significant drop in rates. This means that, for the time being, refinancing does not make financial sense for most homeowners.
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