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The Federal Reserve’s series of jumbo interest rate hikes may seem counterintuitive, but they could stimulate the mortgage industry by driving a massive wave of cash-out refinances, according to one industry insider. This insider points to a chart showing household interest expenses are now higher than anytime in the past 50 years, even exceeding the early 1980s period of runaway inflation and 18% mortgage rates.
With the Fed aggressively raising rates to combat current 40-year-high inflation, credit card, auto, and other non-mortgage debt interest rates are surging rapidly. However, homeowners locked into 3-4% mortgages have been reluctant to give up their historically low rates. The insider believes this will change as unbearable pain from high revolving debt interest forces homeowners to refinance.
To reduce overwhelming interest payments, these borrowers may have no choice but to perform cash-out refis at 7-8%, pulling home equity to pay off credit cards and other high-rate debt. This locks in lower total interest over the 30-year mortgage, providing payment relief. The insider argues this is good for lenders as waves of 3-4% mortgages are replaced with 7-8% mortgages, allowing lenders to collect far more interest for decades.
The insider further contends the Fed made an error in allowing rates to fall so low, freezing housing activity. Now the Fed must overcorrect with high rates to stimulate economic growth and consumer behavior. The resulting financial pain is building up pressure that will lead to the next refi boom.
While rising rates are difficult for households, the insider believes the Fed’s inflation fight may unintentionally provide the catalyst to finally motivate reluctant homeowners to refinance. This could result in a cash-out driven refi wave, replacing low mortgages with new higher-rate mortgages that produce long-term revenue windfalls for lenders.
