December 16, 2015

More Homeowners Tap Equity

More Homeowners Tap Equity

Refinancing activity remained high relative to historical averages during the third quarter of 2015 as homeowners took advantage of low mortgage rates. Refinances made up approximately 50% of single-family applications in the third quarter of this year. We expect the trend to continue through the fourth quarter and into the first quarter of 2016.

In the third quarter of 2015, "cash-out" borrowers, those who increased their loan balance by at least 5%, represented 40% of refinances. Though cash-out shares have been increasing in recent quarters, they are substantially below the 89% peak in the third quarter of 2006. We estimate $12.2 billion in net home equity was cashed out during the refinance of conventional, conforming home mortgages, up from an estimated $10.9 billion in the second quarter. The peak in cash-out refinance volume of $84.0 billion occurred during the second quarter of 2006.

Borrowers cut their mortgage rate by about 22%, or an average interest-rate reduction of 1.2 percentage points, through refinancing. Furthermore, 37% of homeowners refinanced into a shorter-term fully amortizing loan, to pay down principal and build home equity faster than on their previous loan.

Among the refinanced loans in Freddie Mac's analysis, the median appreciation of the collateral property was 6% over the median prior-loan life of 7 years. This was the fourth consecutive quarter of price appreciation.

More than 95% of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless what the original loan product had been. For example, 77% of borrowers who had a hybrid ARM chose a fixed-rate loan during the third quarter while the remaining 23% chose to refinance back into a hybrid ARM.

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