Freddie Mac has released the results of its second quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house. The analysis shows that 77 percent of homeowners who have refinanced have been able to maintain or reduce their mortgage debt in second quarter of 2011.
"Cash-out" borrowers, or borrowers who have increased their loan balance by at least five percent, represented 23 percent of all refi loans; the average cash-out share during the 1985 to 2010 period was 46 percent.
"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," said Frank Nothaft, Freddie Mac vice president and chief economist.
The median interest rate reduction for a 30-year fixed-rate mortgage was approximately one percentage point, or a savings of approximately 18 percent in interest rate. Over the first year of the refinance loan life, these borrowers will save in excess of $1,550 in interest payments on a $200,000 loan.
The net dollars of home equity converted to cash as part of a refinance of a conventional, prime-credit home mortgage was an estimated $7.5 billion in the U.S. during the second quarter, similar to the first quarter level, but substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006. Taken together over the first two quarters of 2011 and adjusting for inflation, the amount of equity cashed-out was at the lowest level in 15 years, since the second half of 1996.
"Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 50 years to lock in interest savings," said Nothaft. "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 (PMMS)."
Among the refinanced loans in Freddie Mac's analysis, the median value change of the collateral property was a negative seven percent over the median prior loan life of five years. In comparison, the Freddie Mac House Price Index (HPI) shows about a 25 percent decline in its U.S. series between March 2006 and March 2011. Thus, borrowers who refinanced in the second 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.