Most people assume refinancing is a personal financial choice with no impact on the broader market. In reality, when many homeowners refinance at once, mortgage rates for everyone else can rise.

Here is why.

Many mortgages are bundled into bonds and sold to investors through government backed agencies. These bonds carry limited credit risk, so the primary concern for investors is prepayment risk, which occurs when borrowers pay off their mortgages early, usually by refinancing when interest rates fall.

When a wave of refinances happens, investors receive their money back sooner than expected and must reinvest those funds at lower interest rates. This eliminates the long term benefit of the higher fixed rate they originally expected to earn.

Because rapid or unexpected refinancing reduces investor returns, it can prompt them to demand higher yields on new mortgage backed securities. Higher yields for investors translate directly into higher mortgage rates for borrowers.

So while refinancing may save one household money, a widespread refinancing surge can push rates upward across the entire market.  Considering a refinance or planning a move? Understanding how rates behave can help you make smarter decisions in today’s market.

If you want guidance tailored to your situation, reach out anytime.

• Federal Housing Finance Agency: Mortgage Backed Securities Overview
  

• Consumer Financial Protection Bureau: Understanding Mortgage Refinancing

• Why do interest rates matter?

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