More than 5 million borrowers just missed their chance to save on a mortgage refinance

Fast-rising interest rates have caused the number of borrowers who could benefit from a mortgage refinance to plummet.

According to Black Knight, the average rate on the 30-year fixed loan has jumped more than 50 basis points since the start of the year, cutting the number of candidates to just 5.9 million. At the start of this year and late 2020 there were about 20 million.

Black Knight defines a refinance candidate as 30-year mortgage holders with a maximum 80% loan-to-value ratio and credit scores of 720 or higher, who could shave at least 0.75% off their current first lien rate by refinancing.

According to the Mortgage Bankers Association, mortgage applications to refinance a home loan are down by half from a year ago. The impact on lending volume is enormous, but there is also a lagging impact on consumer spending, as borrowers lose out on savings that they might spend on something else.

Since rates have been so low for so long, borrowers may not have felt the need to rush into a refinance. Maybe they thought rates would go even lower. Over the last two years, nearly 18 million homeowners have refinanced. The volume won't hold at higher rates.

The vice president of enterprise research and strategy with Black Knight said that the refi volumes are shaping up to rival those of any of the six years prior to the pandemic.

Black Knight had already been tracking a shift to an equity-focused refinance market, and these latest rate increases have accelerated that phenomenon.

Homeowners are sitting on a record amount of equity because of the rise in home prices. They gained an average of $50,200 in housing wealth last year.

The 5.9 million borrowers could still see considerable savings from a refinance, with an aggregate monthly savings of $1.6 billion, despite the recent rate rise. More than a million borrowers could save at least $400 a month, and 661,000 could save $500 or more.