75 Percent of Refinancing Homeowners Maintain or Reduce Debt in First Quarter
Real Cash-Out Volume Reaches 15-Year Low
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McLean, VA – Freddie Mac (OTC: FMCC) released the results of its first quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house.
In the first quarter of 2011, 3-out-of-4 homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Fifty-four percent maintained about the same loan amount, the highest share since 1985, when Freddie Mac began keeping records on refinancing patterns. In addition, 21 percent of refinancing homeowners reduced their principal balance.
“Cash-out” borrowers, those that increased their loan balance by at least five percent, represented 25 percent of all refinance loans; the average cash-out share over the past 25 years was 62 percent.
The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 15 years (third quarter of 1996). In the first quarter, an estimated $6.0 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $9.1 billion in the fourth quarter and substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006.
Among the refinanced loans in Freddie Mac’s analysis, the median appreciation of the collateral property was a negative six percent over the median prior loan life of five years. In comparison, the Freddie Mac House Price Index shows a 21 percent decline in its U.S. series between the end of 2005 and end of 2010. Thus, borrowers who refinanced in the first quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years.
The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.2 percentage points, or a savings of about 20 percent in interest costs. Over the first year of the refinance loan life, these borrowers will save over $1,800 in interest payments on a $200,000 loan.
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:
“The average interest rate on single-family mortgages outstanding at the end of 2010 was about six percent, so there are still plenty of homeowners that can benefit from refinancing. We found the typical borrower reduced their interest rate about 1.2 percentage points by refinancing during the first quarter. For a 30-year fixed-rate mortgage with a $200,000 loan balance, that’s a monthly payment savings of about $150.
“Consumers continue to reduce their debt, either by paying down or paying off their mortgage loan, or reducing the interest cost. Homeowners’ aggregate financial-obligation ratio, which peaked during the third quarter of 2007, had dropped by the end of 2010 to a level last seen more than a decade ago.”
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Cash-out Refinance Analyses Information
These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.