Mortgage rates: Homeowners face a shrinking window to refinance

Millions of homeowners no longer would benefit from refinancing after mortgage rates jumped to their highest levels since the pandemic began.

The population of high-quality refinance candidates who could shave three-quarters of a point from their mortgage rate fell to 5.9 million in the third week of January, according to figures mortgage technology and data provider Black Knight gave Yahoo Money, down from 7.1 million last week and down from 11 million in December.

That’s also far lower than the 20 million homeowners who could refinance a year ago. The last time the pool of refi candidates dipped to this level was in November 2019 when rates were around 3.75%. More homeowners will face a closing refi window if rates continue their expected upward trajectory.

“The number of high quality refinance candidates has already pulled back by more than a third over the first two weeks of 2022 alone, as 30-year rates have moved noticeably higher,” said Andy Walden, Black Knight’s vice president of enterprise research and strategy. “While the current forecast consensus has rates staying under 4% through the end of this year, a scenario where we reached that point would see the population cut in half yet again, with fewer than 4 million high-quality candidates remaining."

Mortgage rates expected to reach 4% by December

The rate on the 30-year fixed mortgage climbed to 3.56%, according to Freddie Mac, climbing from 3.45% the previous week and marking the highest level since March 2020. The rate on the 15-year fixed mortgage — a popular refinance home loan option — rose to 2.79%, from 2.62%.

Economists predict rates will climb even higher.

The Mortgage Bankers Association (MBA) expects the average 30-year mortgage rate to rise gradually throughout the year, reaching 4% by the fourth quarter and 4.3% in 2023.

The surge in rates are due in part to the Federal Reserve signaling plans to make moves to combat high inflation after consumer prices jumped nearly 7% in December, the biggest gain since 1982. Fed officials expect to hike the central bank’s key short-term interest rate at least three times this year.

The rise in rates have already dampened refi interest. The latest MBA weekly survey showed refinance applications slipped 3% last week, and stand 49% lower than a year ago, when the 30-year fixed rate mortgage was 2.77% and the 15-year rate averaged 2.21%. Refinance originations are expected to drop to $870 billion this year from an estimated $2.32 trillion in 2021, according to the MBA’s mortgage market forecast for year-end 2021 and 2022.

Major savings for those who can refinance

Still, the 5.9 million U.S. homeowners identified by Black Knight who could benefit from refinancing could save about $275 a month if they refinance at today’s rates.

Over 1 million of those homeowners could save up to $400 per month, or an estimated $4,800 a year, including 661,000 mortgage-holders who could average monthly savings of $765, or $9,180 a year.

Black Knight defines refinance candidates as 30-year mortgage holders with a maximum 80% loan-to-value ratio and credit scores of 720 or higher who could cut at least three-quarters of a point off their current rate by refinancing.

Removing that eligibility criteria, there are still 10 million borrowers with 30-year mortgages with current rates that are three-quarters of a point higher than Freddie Mac’s reported average and who could save money by refinancing, according to Black Knight.

‘You’ll need to have the highest credit score’

Other factors outside the current rate environment also help determine your refinance rate, including your home’s location, mortgage type, home equity, and credit score.

“In terms of getting the lowest interest rate, you’ll need to have the highest credit score. You’ll also need to have a pretty deep equity position,” said Keith Gumbinger, vice president of mortgage-information company HSH.com. “Credit scores that are at a FICO 740 or above will generally bring the lowest interest rate to borrowers, and if you have a lower credit score, that may mean your interest rate or fees for the loan may be higher.”

Being prepared and acting fast are also key as rates tick higher.

“If a borrower can find a rate that suits them that is a lower rate than they have currently, they have all of their ducks in a row, and their employment and income hasn’t been impacted, that would be a good combination of things to consider refinancing if they haven't already done so,” said Joel Kan, associate vice president of economic and industry forecasting for MBA. “Maybe at this point in time, talking to a few different lenders to see what kinds of loans they may qualify for in terms of getting not just the lowest rate, but what could be easiest to close on.”

Editor's note: This version corrects the number of potential refinance candidates to 5.9 million.

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

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