Buying a home is quite different from refinancing one. Indeed, buying a home is a highly emotional and transformational experience. When you buy a home, you feel secure and confident about the future.
Mortgage rates have fallen to record lows. As a result, this summer applications to purchase a home surged to the highest level since 2009. New house sales have also jumped to the highest level since 2007. Low rates have resulted in an increased volume in refinancings, which is on track to grow to the highest level in 17 years.
For a lender, purchase loans are a more stable and predictable business than refinancings, which are more geared to fluctuations in interest rates. Typically, homeowners refinance because they want to lower their monthly payments. Here’s what my home-loan company has learned about our customers who are obtaining a loan to purchase a home and those who are refinancing one:
1. Millennials drive the purchase market: Millennial buyers make up 54% of our customers who have purchased a home so far in 2020.. This might be because of the sheer size of the millennial generation. In fact, they are now the largest generation in the U.S., having overtaken baby boomers. The millennial population is also growing as young immigrants join this cohort. While many of these millennials have to rely on the “Bank of Mom and Dad” to obtain the funds for the down payment, they view owning a home as an important and transformational step in their lives.
2. Generation X drives the refinance market: Generation X makes up 31% of our customers who have purchased a home this year. Yet when it comes to refinancings, Gen X leads with 41% of these customers, while millennials make up 36%. Gen Xers are later in their careers and have owned their homes for longer than millennials. They can therefore refinance in greater numbers.
3. Those with high FICO scores drive purchases and refinancings: Our customers with a FICO score above 720 reflect 64% of purchase loans and 76% of refinancings year to date. Those with FICO scores between 680 and 719 make up 18% of purchase loans and 15% of refinancings. Understandably, people with higher credit scores can more readily obtain the financing for home loans and take advantage of lower rates to refinance.
4. High-income individuals lead refinancing activity: Our customers who earn between $150,000 and $300,000 annually make up 29.4% of those refinancing their mortgages year to date. Those with an income between $100,000 and $150,000 comprise 29.1% of refinancings. Yet when it comes to purchasing a home, those who earn the most money make up 22% of purchases. Those earning between $100,000 and $150,000 comprise 25% of purchases. Put simply, high-income individuals are on the lookout for ways to lower their monthly mortgage payments.
5. Home buyers have a higher debt-to-income ratio: Another revealing finding is that our customers with debt-to-income (DTI) ratios between 41% and 50% make up 38% of the total amount year to date, the largest among our customer base. When it comes to refinancing, our customers with a DTI below 35% make up 52% of refinancings this year, which is the largest segment among our customers. This is logical, as those who are refinancing may have owned their homes for longer and are likely to be later in their careers, so they have lower DTIs.
Sanjiv Das is CEO of Caliber Home Loans. Previously, he was CEO of CitiMortgage.