Lowest number since 1985: Fewer homeowners taking cash out during refinancing

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In the second quarter of 2003, 32 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least 5 percent higher in amount than the original mortgages, according to Freddie Mac's quarterly refinance review. |ret||ret||tab|

This is in contrast to the second quarter of 2002, when 63 percent of refinanced loans had higher new loan amounts, and to the first quarter of 2003 when 41 percent of refinanced loans in had higher new loan amounts.|ret||ret||tab|

"It comes as no surprise that this figure of 32 percent represents the smallest number of refinancing homeowners to take cash out of their homes that we have seen since we began doing this report in 1985. Mortgage rates have fallen to such incredibly low levels that homeowners are refinancing now primarily for the low rates, rather than to take out equity," said Amy Crews Cutts, Freddie Mac deputy chief economist, in a news release. |ret||ret||tab|

"Adversely, as mortgage rates begin to rise, we will see a rise in the share of loans that are cashouts because the refinance incentive from lowered interest rates will have disappeared and homeowners who will refinance with higher rates are doing so to access equity in their homes."|ret||ret||tab|

However, Freddie Mac's most recent quarterly economic forecast sees economic growth of only about 3.5 percent during the second half of this year. Therefore, there will be little inflationary pressure that would cause mortgage rates to rise much above their current level of about 6 percent.|ret||ret||tab|

"Consistently low mortgage rates will continue to be a boon to the housing industry as we go into the last half of this year, and sales should remain brisk for some time to come," said Cutts. "So far in 2003, homeowners have converted about $50 billion of their home equity into cash, compared with $96 billion in the year 2002 and $83 billion in all of 2001, providing at least one leg for the sluggish economy to stand on over the last few years."|ret||ret||tab|

"However, the amount of cash homeowners have taken out in equity is only a small portion of the $7.7 trillion worth of equity value currently held in single-family homes," Cutts added.|ret||ret||tab|

"Homeowners who are presently refinancing their original fixed-rate mortgages are entering into new mortgages that are, on average, 1 1/8 percent lower than the original mortgage. In aggregate these interest savings add up to more than $600 million per month for homeowners who have already refinanced this year."|ret||ret||tab|

The report shows that the median age of the refinanced loan was only 1.8 years and that 16 percent of loans being refinanced were for lower amounts than the original mortgage.|ret||ret||tab|

The review also revealed that properties refinanced during the second quarter 2003 experienced a median house-price appreciation of 3 percent during the time since the original loan was made, down from the 20 percent appreciation for loans refinanced in second quarter 2002. Freddie Mac's Conventional Mortgage Home Price Index shows the cumulative growth in the value of housing, on a national average, to be about 40 percent over the past five years. Freddie Mac's economists have revised their forecast for home price appreciation to an annualized growth rate of about 6.1 percent for 2003.|ret||ret||tab|

These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to ensure that the latest loan is for refinance rather than home purchase. |ret||ret||tab|

The Freddie Mac analysis does not track the use of funds made available from these refinances.|ret||ret||tab|

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