Ultra-low interest rates have pushed the rate of mortgage prepayments up to its highest level since 2005, according to home loan data company Lender Processing Services.
Mortgage prepayments are defined as anytime a loan is closed on a lender’s books before the end of the original term. This includes when a loan is simply paid off early by the homeowner, but also when a loan is refinanced, or the property is sold, or the borrower defaults.
With interest rates falling deep into record-low territory, reaching as low at 3.36 percent, excluding points, last week, homeowners are not wasting the opportunity to slide into lower payments and lower overall loan balances.
“There should be a lot of opportunity for people to refinance,” Herb Blecher, senior vice president at LPS Applied Analytics said in an interview with Bloomberg.”The interest rate environment is favorable even for folks who refinanced recently to get a new loan.”
And indeed those who refinanced as recently as last year are taking advantage of the new lower rates. LPS reported that prepayment speed increased 23 percent among those who received a new home loan a year ago.
Prepayments also grew quickly among underwater borrowers, increasing 65 percent among borrowers who owe 20 percent or more than their homes are worth. Certainly some of that is do to foreclosure, but many underwater homeowners have been able to refinance with recently-tweaked government refinance programs.
If the current pace of mortgage prepayment were to remain steady, 25 percent of all mortgage debt would be eliminated within the next 12 month, according to LPS.
Interest rates have found new lows as a result of the Federal Reserve’s decision to buy up more mortgage-backed securities. The Fed has also promised to keep rates unseasonably low for at least the next two years, making a rising prepayment rate a very likely part of the near future.