Refinance > Issues

Refinancing homeowners continue to 'pay-in' at near record levels

(11/09/2010) Homeowners are still treating their homes like ATMs, but now they are more likely to put money in rather than take money out.

Given continued economic uncertainty, that's makes good frugal sense.

Freddie Mac says 33 percent of refinancing homeowners lowered their first mortgage's principal balance by paying cash before closing the deal, during the third quarter this year.

That's is the second time the "cash-in" share hit record levels since Freddie Mac began keeping records on refinancing trends in 1985.

The record high was 46 percent of refinancing homeowners lowering their mortgage balance, during the fourth quarter 2009.

"Borrowers are responding to the low rates, with over 80 percent of new loan applicants looking for a refinance. Mortgages dropped during the third quarter to levels not since the early 1950s," and have remained low since, said Frank Nothaft, Freddie Mac vice president and chief economist.

Conversely, "cash-out" borrowers, home owners who increased loan balances by at least 5 percent, represented 18 percent of all refinance loans -- the lowest cash-out share since the analysis began in 1985.

The trend of declining cash-out refinancing is due to reduced home prices and equity, tighter underwriting standards for loan-to-value ratios, and borrowers' desire to pay down debt.

Among the refinanced loans in Freddie Mac's analysis, the median appreciation of the collateral property was a negative 3 percent over the median prior loan life of 3.8 years.

The median interest rate reduction was about 1 percentage point, or at least 18 percent. Over the first year of the refinance loan life, these borrowers will save over $1,400 in principal and interest payments on a $200,000 loan.

The higher cash-in share, in combination with low cash-out refinancing activity, brought the net dollars of home equity converted to cash to the lowest level in 10 years.

In the third quarter, an estimated $7.4 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $9.4 billion in the second quarter and less than 10 percent of the peak cash-out volume of $84 billion in the second quarter of 2006.

"We're seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession, with non-mortgage consumer debt falling more than 5 percent since 2008, according to the Fed," said Nothaft.

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