In the third quarter of 2009, one-half of borrowers who refinanced their conventional loan lowered their annual mortgage interest rate by at least 17 percent according to Freddie Mac’s quarterly Refinance Report. The new interest rate was about 1.1 percentage points below the old rate. In aggregate the interest-rate reduction adds up to about $3 billion in payment savings for these homeowners over the first 12 months of the new loan.
“Homeowners are benefiting from an extended period of very low interest rates. In the first nine months of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1, the lowest such average in the 38-year history of Freddie Mac’s Primary Mortgage Market Survey (PMMS),” said Frank Nothaft, Freddie Mac vice president and chief economist. “At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program (HARP) that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity. As of Aug. 31, over 93,000 borrowers had taken advantage of this opportunity according to the Federal Housing Finance Agency (FHFA), with the bulk of those occurring in July and August.”
Freddie Mac’s Refinance Report also indicates that 64 percent of prime borrowers who refinanced a conventional, first-lien mortgage either kept about the same principal balance or reduced it, the highest such share in six years. The share of refinance loans resulting in new loan amounts that were at least five percent higher than the paid-off first-lien mortgage balance, a measure of “cash-out” refinancing, fell to a six-year low of 36 percent in the third quarter.
"In the third quarter, about $20 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage. Over the first three quarters of this year, the aggregate amount cashed out has been approximately $60 billion. Adjusting for inflation, this was the smallest volume of equity extraction over the first three quarters of a year since 2000,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “The principle cause of the decline in cash-out refinance is that homeowners have a smaller equity cushion. The median property refinanced in the third quarter had no net appreciation over the time since the previous mortgage was taken out, which was three and a half years ago.”
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.
For more information, visit www.freddiemac.com.