In the fourth quarter of 2008, U.S. homeowners cashed out $17.5 billion in home equity through the refinance of prime first-lien mortgages – the lowest amount since the first quarter of 2001, according to Freddie Mac's quarterly refinance review.
This is down from a revised $28 billion in the third quarter. In addition, 14% of refinancing homeowners paid in extra money when they refinanced, reducing their mortgage debt. This is the highest cash-in share since the fourth quarter of 2004, when 19% of refinancing homeowners put cash into home equity. Also at a four-year low, the share of refinance loans resulting in new loan amounts that were at least 5% higher than the paid-off first-lien mortgage balances fell to 62% in the quarter. The third-quarter cash-out share was revised down to 76%.
"When interest rates fall sharply, we tend to see more borrowers go for a simple rate-and-term refi that lowers their payment or lets them keep their payment about the same but shorten the maturity of their mortgage obligation" notes Frank Nothaft, Freddie Mac's vice president and chief economist. "At the same time, many borrowers who are attracted by lower mortgage rates take the opportunity to pay in additional money either to remove the need for mortgage insurance or to get to a lower loan-to-value ratio, so they can qualify for the best rate.
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to verify that the latest loan is for refinance rather than for home purchase. The Freddie Mac analysis does not track the use of funds made available from these refinances.
SOURCE: Freddie Mac