August 4, 2011 (Jeff Alan)
Falling home values have left home equity piggy-banks pretty empty as of late. According to a recent report by Freddie Mac, the total amount of cash that borrowers who refinanced their first-lien mortgages took out of their homes was less than 10 percent of the total amount of cash that they took out just five years ago.
The report found that 23 percent of all refinanced loans in the second quarter of 2011 were “cash-out” borrowers, those that increased their loan by at least five percent, with an estimated net dollars of home equity converted to cash estimated to be $7.5 billion.
That’s less than nine percent of the total amount that borrowers took from their homes compared to when cash-out refinance volume peaked in the second quarter of 2006 at $83.7 billion.
Combining the second quarter of 2011 with the first quarter of this year, which saw a similar level of refinance activity, and adjusting for inflation, the amount of equity cashed-out was at the lowest level since the second half of 1996.
Not only has the amount of home equity borrowers cashed-out decreased, so has the number of borrowers compared to previous years. The average percentage of cash-outs during the 1985-2010 period was 46 percent, today the amount is half of that.
Most homeowners who refinanced their first-lien home mortgage either maintained the same the same loan amount or lowered their principal by putting “cash-in.” Over half, 51 percent, maintained about the same loan amount while 26 percent of refinancing homeowners put cash in, reducing their principal.
For 30 year fixed rate mortgages, the median interest rate reduction was about 1 percentage point, a savings of over $1550 in interest payments in the first year of the loan with a principal of $200,000.
Frank Nothaft, Vice President and chief economist of Freddie Mac stated, “This is primarily a ‘rate-and-term’ market, meaning that the typical homeowner is looking to cut their interest rate or shorten their loan term. More than three-in-four borrowers are keeping their loan balance about the same or reducing their loan balance when they refinance.”
“Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 50 years to lock in interest savings. Over the first half of 2011, fixed-rate mortgage rates hit a low during June, with 30-year product averaging 4.50 percent and 15-year averaging 3.68 percent over the last four weeks of June, according to our Primary Mortgage Market Survey,” he added.
Tags: Freddie Mac, home equity, piggy-bank, borrowers, refinance, cash-out, cash-in, principal, interest, interest rate reduction