Mortgage lock rates surge in January, as borrowers beat rising rates

As mortgage rates jumped, millions of borrowers raced to lock in rates in January, according to a new report.

Nationwide, rate locks rose 9.5% from December after four months of declines, according Black Knight’s latest Originations Market Monitor report, driven by a 19.9% increase in purchase loans and a 9.2% rise in cash-outs refinances.

The report underscores how quickly the mortgage rate landscape has changed for homeowners and buyers, who now must act fast to secure low rates.

“Amidst a backdrop of the Omicron variant, inflation concerns, Fed tapering and multiple rate hikes on the horizon, mortgage rates soared over the first weeks of 2022,” Scott Happ, president of Optimal Blue, a division of Black Knight, said in a statement. “Still, despite this increase — and in some ways, because of it — lock activity improved in January for the first time in four months.”

Buyers make a move

Buyers are against the wall, contending with double-digit home price growth and a consistent lack of homes for sale.

Inventory levels plunged to historic lows due to supply-chain constraints throughout the pandemic and stubbornly high demand. As a result, home price growth skyrocketed and left buyers with fewer affordable options, according to the National Association of Realtors (NAR).

During the last three months of 2021, the median sales price of a single-family home rose 14.6% to $361,700. Similarly, 67 of 183 metro areas witnessed double-digit growth in home prices as eager buyers competed with very limited supply.

To put it into context, there are roughly 14.6 million households in the income bracket between $35,000 to $50,000, but only 98,586 available homes within their budget. According to NAR, in 2019, these same households could afford up to 260,004 active listings on the market.

The average loan amount increased $6,400 in December, according to figures from Black Knight, and could trend higher in recent months.

Now they’re facing an increasing rate environment.

“As a first-time homebuyer, you really need to look at what you’re up against going into 2022. Demand is strong and there are still supply-chain issues. That creates price demands in those markets in addition to inflation pressures and rising rates,” Jeffrey Ruben, president of WSFS Mortgage, told Yahoo Money. “It’s still a very attractive time to be a buyer, but the clock is ticking. If you continue to delay that purchase, you’re probably looking at a more expensive home and costly mortgage. It’s frankly better to act now rather than later, but that’s easier said than done.”

Cash-out locks on the rise

As home values surged last year, Americans capitalized on tapping the record amount of home equity they gained. Cash-out refinancings — the amount homeowners can borrow while retaining at least 20% of their property value — made up 54% of all refinances in the third quarter, according to Black Knight’s latest figures.

“When we talk about cash-out refinancing, interest rate sensitivity still exists but it isn’t quite as strong as it would be for a rate-and-term refinance,” Keith Gumbinger, vice president of HSH.com, told Yahoo Money. “A borrower looking to do a cash-out often may be replacing a much higher interest rate debt with a lower interest rate debt.”

Cash-out activity is expected to continue — especially as some homeowners use the money to pay off credit card debt because rates on that debt will rise in lockstep with Federal Reserve interest rate hikes.

“Your credit card rates might be at 13% or 14% … a 3.5% interest rate is just fine because your cash-out refi is going to help solve your problem,” Gumbinger said, “which is to pay off your credit cards and they will be paid off at a lower interest rate.”

Locks on traditional refinances drop

Rising mortgage rates have shut the door on many traditional refinances.

Rate-and-term locks fell for the fifth consecutive month, dropping 16.5% — and are now at their lowest level since May 2019. These traditional refinances registered an 80% year-over-year decline and pushed the overall refi share to 43%, according to Black Knight, the lowest share of the market since July 2019.

The population of high-quality refinance candidates who could shave three-quarters of a point from their mortgage rate dropped to 3.8 million when the 30-year fixed rate mortgage hit 3.92%, according to figures Black Knight gave Yahoo Money.

This is a sharp contrast to the 11 million high-quality refi candidates seen in the first weeks of the year and pales in comparison to the 19 million refi candidates a year ago. Black Knight estimates that refi activity could pull back by more than 60% in 2022.

“There is great interest rate sensitivity when we talk about refinancing. That’s particularly true for borrowers looking for a rate-and-term refinance, generally known as a traditional refinance,” Gumbinger said. “When you’re trying to get a lower payment, obviously you won’t get a lower payment if your interest rate isn’t lower.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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