Rising Mortgage Rates Are Making it Harder to Refinance in 2022

Mortgage rates have risen steadily and substantially over the past few weeks, and this could put refinancing out of reach for millions of homeowners in 2022. In fact, the ongoing rise of mortgage rates has already close the refinancing “window” for many U.S. homeowners.

This week, the average rate for a 30-year fixed mortgage loan rose to its highest level in more than 10 years. And given the current state of the economy, they could climb even further over the coming months.

Homeowners who want to refinance in order to reduce their monthly payments might have missed the boat.

Mortgage Rates Climb Above 5% in Spring 2022

On May 12, 2022, the government-sponsored mortgage buyer Freddie Mac reported that the average rate for a 30-year fixed mortgage had hit 5.3%. This latest increase followed several weeks of upward movement, a trend that began earlier this year and has yet to subside.

(It’s worth noting here that the 30-year fixed is by far the most popular financing option used by home buyers in the U.S.)

The chart below shows the average rate for a 30-year fixed mortgage loan going back three years. It’s based on the weekly Primary Mortgage Market Survey conducted by Freddie Mac, and it illustrates the key points made earlier.

Mortgage rates averages May 2022
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

If we zoomed this chart out to show the past ten years, you’d see that current mortgage rates are at their highest point in over a decade. The last time that 30-year home loan rates averaged above 5.3% was way back in June of 2009.

Home loan rates have risen substantially since the start of 2022. During the first week of January, for instance, 30-year mortgage loans held an average rate of 3.22% according to Freddie Mac. That means they’ve risen by more than 2% in a little over four months.

According to the May 12 Freddie Mac report:

“Homebuyers continue to show resilience even though rising mortgage rates are causing monthly payments to increase by about one-third as compared to a year ago.”

They went on to acknowledge that rising costs could cool the housing market:

“In the months ahead, we expect monetary policy and inflation to discourage many consumers, weakening purchase demand and decelerating home price growth.”

Home Refinancing Activity Has Dropped Significantly

Given the sharp rise in mortgage rates mentioned above, it should come as no surprise that home refinancing activity has declined in 2022. Far fewer homeowners are in a position to refinance these days, compared to where we were just a year ago.

According to a recent report from the Mortgage Bankers Association (MBA), refinancing applications have declined significantly in recent weeks. The industry group reported that their “Refinance Index” was down 72% during the week of May 6, compared to a year earlier.

People refinance their homes for different reasons. Some people use the cash-out refinance option to convert some of their home equity into usable cash.

But for many homeowners, the most common reason for refinancing is to secure a lower rate and a smaller monthly payment. The steady rise of mortgage rates has made this latter goal harder and harder to achieve, for homeowners all across the U.S.

Higher Rates Haven’t Slowed Home Buying (Yet)

Surprisingly, the higher mortgage rates we are seeing in 2022 haven’t had much impact on home-buying activity nationwide. While mortgage refinance applications have fallen off a cliff, purchase applications continue to chug along at a steady pace for the most part.

According to the MBA report mentioned above, the nationwide “Purchase Index” declined by only 8% over the past year or so. Compare that to the 72% reduction in mortgage refinancing activity, and you can see the clear distinction.

The bottom line is that higher home loan rates have significantly reduced the number of refinance loans, while having much less impact on home buyers.

Of course, this could change over the coming months. Rising mortgage rates are just one factor putting the squeeze on home buyers across the U.S. We’re also experiencing steady inflation and the ongoing rise of house prices. Everything is getting more expensive these days.

With all of these costs rising, we could see a slowdown in real estate market activity later in 2022.

Yes, inventory continues to hover at record-low levels in many cities. And such conditions tend to accelerate the real estate market. But when it comes to rising costs, buyers can only take so much.

If mortgage rates and home prices continue to climb, on top of general inflation, it could put the dream of homeownership out of reach for an increasing number of Americans.