Mortgage prepayment activity was down just 19.1% from March to April and 61.8% from a year ago, according to research from mortgage data and analytics firm Black Knight.
Why is prepaid activity dropping so dramatically? It’s driven in large part by higher mortgage rates and how low refinancing activity is as those rates go up, says Greg McBride, chief financial analyst at Bankrate. While rates on 30-year fixed-rate mortgages were hovering around 3% in 2021, they are now well above 5%, with some professionals saying they will rise. (You can see the lowest mortgage rates you can qualify for here.) “High mortgage rates are likely to be the reason for the sharp drop in rates. With mortgage rates exceeding the 5% threshold, many homeowners have lost a major incentive to refinance. ‘” says Kate Wood, the home expert at Nerdwallet.
Part of this may also relate to inflation, which is now at a 40-year high. “Since the start of the year, inflation has increased dramatically and as a result, many households likely have less cash to set aside for non-essentials such as putting extra money into paying off a mortgage,” says Jacob Channel, chief economist at LendingTree.
Making payments earlier than required helps borrowers save on tax-deducted interest, and paying off the loan sooner means increasing the amount of equity in the home. But some mortgage companies fine borrowers for prepayment. Furthermore, many people have taken out a mortgage or refinance at very low interest rates, which means that they have such low mortgage rates that they are in a better position to put their money into higher interest debt. But it’s also important to note that this isn’t the first time that prepaid activity has fallen sharply.
What does this mean for home buyers and sellers?
Ultimately, as long as buyers are able to keep up with their regular monthly payments, it is likely that fewer people making additional mortgage payments will not have much of an impact on the broader housing market. “With prices rising and rates the same, some buyers may have to settle for not being able to make extra payments on their mortgage, even if they’d rather be able to pay off their loans ahead of schedule,” Chanel says.
Lower prepayment activity could also signal less liquidity among new buyers, says Channel, so some sellers may find their homes are on the market for a bit longer or attract fewer potential buyers than was common for most of 2020 or 2021, the channel says. . “However, there is still a huge demand for homes among buyers, so sellers shouldn’t worry too much,” he adds.
There may be a positive side to home buyers and sellers in all of this. Lenders aren’t overwhelmed by requests for refinancing, McBride says, so the mortgage process may go more quickly, assuming lenders are staffed.