Freddie Mac’s recent report, “U.S. Economic, Housing, and Mortgage Market Outlook,” sheds light on the current state of refinancing trends. Higher mortgage rates since 2022 have significantly slowed refinancing activity. With the average mortgage rate on outstanding loans at 4.1% in Q1 2024 and rates climbing to 6.9% by the end of Q2 2024, homeowners have little incentive to refinance. However, refinancing remains an option for those looking to extract equity, extend loan terms, or remove private mortgage insurance payments.

Record Low Refinancing

In the first half of 2024, refinance originations reached their lowest level since the mid-1990s, totaling $147 billion—the smallest amount since 1995. High mortgage rates have decreased the number of rate-and-term refinances while increasing the share of cash-out refinances, which made up about 85% of conventional refinances. Despite this shift, the total equity cashed out was low, around $25 billion, compared to $144 billion in 2022.

Extracting Equity

A cash-out refinance lets homeowners replace their existing mortgage with a larger one, tapping into their home equity. The difference between the old and new loan amounts is taken as cash, which can be used for home improvements or debt consolidation. In early 2024, homeowners extracted an average of $93,000 through cash-out refinances, accounting for about 24% of the average property value.

Loan Term Preferences

Fewer borrowers are opting for shorter-term mortgages, while more are choosing to maintain the same term or extend it to reduce monthly payments. In early 2024, just 8% of borrowers reduced their loan terms, up slightly from the historical low of 5% at the end of 2023.

Anticipated Fed rate cuts in late 2024 may lower mortgage rates and boost refinance activity into 2025. Despite higher rates, record home equity will continue to support cash-out refinancing as an attractive option for homeowners.