Reviewed by Aug 27, 2020| Updated on
What is Burnout?
Burnout defines a period during which mortgage-backed securities' (MBS) prepayment rates drop despite dropping interest rates. The mortgage investors who support the MBS have an opportunity to refinance as the borrowing rate decreases. It's due to burnout if they fail to take advantage.
Burnout is often described as a "burn-out" and regarded as a "burnout syndrome" or "burnout refinancing."
Breaking Down Burnout
Burnout is closely related to the world around interest rates. When interest rates decline in any given month, it typically leads to a higher monthly single mortality—in other words, a greater average principal repayment on the MBS.
MBS holders, with investments consisting of a bundle of home loans purchased from the banks, do not want people to settle their mortgage debts before they are due. Sure, through the prompt repayment of the mortgage, they get their money back quicker than expected. Yet that also results in them losing out on receiving all the interest, the annual fees paid to borrow money to buy a home, which they hoped to obtain as part of the deal.
For any mortgage finalised prior to a spike in interest rates, there would be a stage where refinancing at the lower rate is more prudent than hanging on to the current loan. There are a variety of variables that influence the borrower's ability to refinance, thereby affecting burnout.
Fixed costs may be incurred for refinancing, which varies from state to state and according to the terms of each loan. If the fixed refinancing costs are high, people are more hesitant to refinance unless there are even greater interest savings.
Data shows that refinancing is fast for borrowers with higher credit scores. In other words, they make the decision to amend the payment schedule and terms of a prior credit agreement early in the interest rate downturn, taking steps as soon as it makes economic sense, instead of waiting.