As we head toward the summer of 2026, the makeup of lenders’ volume continues to waffle in purchase and refinance percentages. The Mortgage Bankers Association (MBA) calculates that refis are roughly 50% higher than in the similar period last year. Refis account for 40–50% of application volume, according to the Mortgage Bankers Association. It is a good opportunity to learn about how refinances are treated in the primary and secondary markets, and how this impacts business volumes.
Borrowers who withdraw cash when they refinance are viewed as riskier than those who don’t, because the cash withdrawal indicates possible financial distress, and that perception can raise a borrower’s costs. This causes the rate on cash-out deals to be higher than that on no-cash deals that are otherwise identical. The price difference is particularly large when the borrower’s credit score is low.
However, refinancing borrowers can increase their loan balance by enough to cover their settlement costs without the loan being classified as “cash-out.” The borrower must literally walk away with cash for the transaction to be “cash-out.” Whether or not cash is withdrawn is entirely within the borrower’s discretion, but often the cost of the money they take out of the refinance is underestimated as they view the cost as the rate on the new mortgage, ignoring the higher cost on the existing loan balance. Remember, a cash-out deal raises the LTV. If the borrower must pay a higher mortgage insurance premium at the new LTV, the cost of the cash taken out would be raised even more.
The mortgage interest rate is not usually affected by the LTV, but if the ratio is above 80%, the borrower must pay for mortgage insurance. The insurance premium rises with the LTV and is also subject to the same risk factors as the mortgage rate. Borrowers with low credit scores, for example, will pay higher mortgage insurance premiums. If they intend to finance their closing costs, and especially if they intend to take cash out, they should make sure that this will not breach a notch point and raise their cost. If they find that their loan-to-value ratio is just above a notch point (say, 85.1%), they should beg or borrow the amount needed to reduce the loan amount to the lower price bracket. It would be a very high-yield investment.
Borrowers with LTVs above 80% should make sure that they are not paying more than necessary for mortgage insurance. Check the premium quoted to you, but be aware most lenders only quote monthly premiums, even though in some cases the single premium plan would be less costly to the borrower.
All of this highlights the importance of the secondary markets. Put your shoes into those of a hedge fund, insurance company, or pension fund. These institutions have a wide variety of instruments in which to invest money, and they spend their time weighing risk and return, safety and soundness, and analyzing their portfolio mix.
Prepayment risk sits at the heart of investors valuing mortgage-backed securities. To be blunt, no investor wants to pay 105 for a loan that pays off at 100 four months later (or defaults a year later). When borrowers prepay faster than expected, investors are forced to reinvest returned principal at prevailing market rates, which may be lower than the yield on the original security. As a result, securities that exhibit slower and more predictable prepayment speeds are inherently more valuable, particularly in environments where rate volatility is elevated or where the direction of rates is uncertain.
Specified pools (“spec pools”) address this concern by offering a degree of prepayment protection, and investors are typically willing to pay a premium, known as a “pay-up,” to access that protection. This pay-up represents the incremental price above standard TBA execution and can translate directly into improved economics for lenders who are able to identify and deliver eligible collateral. Some investors may want only pools made up of refinanced loans, whereas others only want pools of MBS made up of purchase loans.
Refinancing may change the makeup of the loan, or loans, in a given pool. The perceived risk calculated by the investor will be quantified and relayed into the pricing that capital markets teams put out to borrowers, loan by loan, pool by pool.
The increasing importance of spec pools also reflects a shift in how mortgage assets are evaluated and traded. Advances in data availability and analytics have enabled investors to move beyond aggregate assumptions and toward more granular, loan-level analysis. Through mechanisms such as bid tapes, which provide detailed datasets on individual loans, investors can assess prepayment risk with greater precision and assign value accordingly. This has led to a more differentiated market in which strong collateral is explicitly rewarded, while less attractive loans may be discounted. While this creates opportunities for enhanced execution, it also introduces greater variability and complexity, requiring more sophisticated infrastructure and expertise on the part of lenders.
This obviously can help, or hurt, borrower pricing. The relationship between spec pool characteristics and pricing is neither static nor simple. In recent months, the level and consistency of pay-ups have become more variable, reflecting the broader uncertainty in rates and volatility. Where pay-ups were once modest and relatively stable, they have now reached levels that can materially influence loan-level economics. Although MLOs may not find themselves explaining these complexities to borrowers, it is important to know the backstory.
