Lower mortgage rates lift refi retention to 3.5-year high

Mortgage rates dropped almost 50 basis points in the third quarter, prompting more borrowers to refinance and retention rates on those customers to hit a three-and-a-half-year high, new industry data showed.

Refinance retention reached 28% last quarter, the highest percentage since early 2022, and servicers held onto more than half of borrowers refinancing out of 2024 vintage loans, according to ICE Mortgage Technology's latest mortgage monitor report.

Rate-and-term retention rose to one of the highest points in the last decade at 37%, while cash-out refinance retention climbed to 23%, reflecting the challenge of identifying and keeping equity-seeking borrowers, the report said.

Nonbank lenders retained borrowers at a much higher rate, 35% to 13%, while mortgages secured by the Federal Housing Administration and Department of Veterans Affairs posted the highest rate at 36%. Government-sponsored equity loans had a 25% retention rate, followed by portfolio-held loans (23%) and privately securitized loans (6%), the report found.

"Modest rate relief this fall has driven mortgage application volumes to multi-year highs, showing the outsized impact that incremental affordability improvements have on borrower behavior and servicer retention opportunities," said Andy Walden, head of mortgage and housing market research at ICE, in a press release Monday. "We're now seeing the highest concentration of rate-and-term refinances in nearly five years, almost entirely driven by borrowers holding 2023-2025 vintage loans."

Rate-and-term refinances made up 62% of all refinance activity in October. An estimated 95% of rate-and-term refinances in September and October were 2023-2025 loans, and the average refinancer carried a loan balance of $505,000 and a credit score around 762. They also saved an average of $200 monthly by reducing their mortgage rate by an average of 0.92 percentage points, the report showed.

Falling short-term rates made tapping equity more affordable as well, as second-lien home equity loan withdrawals hit their strongest level since 2007 in the third quarter. Millions of homeowners are still locked into historically low first-lien rates from the pandemic era, so many are choosing to access equity through second-lien loans, the report said. 

"The market has become more rate sensitive as hundreds of thousands of borrowers move in and out of refinance incentive with small daily rate shifts," Walden said. "This behavior shows how quickly demand can return when affordability improves, and it highlights just how closely households are watching rates as they try to manage monthly costs and access equity."

Ahead of this month's Federal Open Market Committee, the 30-year fixed-rate mortgage decreased four basis points to 6.19%, near its lowest level this year. With the results of the meeting not certain, mortgage rates could shift in either direction as the year comes to a close.

Affordability also reached its best levels in nearly three years. Mortgage rates averaged 6.25% in mid-November, which brought the monthly principal and interest payment for a median-priced home to $2,216, 29.7% of the median household income, the lowest since early 2023, the report found.