Freddie Mac has released the results of its third quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house, as 83 percent of 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; just shy of the record 85 percent during Q4 of 2011. Of these borrowers, 54 percent maintained about the same loan amount, while 29 percent of refinancing homeowners reduced their principal balance.
The average interest rate reduction was about 1.7 percentage points, or a savings of about 31 percent in interest rate, the largest percent reduction recorded in the 27 years of analysis.
"On average, borrowers who refinanced reduced their interest rate by about 1.7 percentage points," said Frank Nothaft, vice president and chief economist of Freddie Mac. "On a $200,000 loan, that translates into saving about $3,500 in interest during the next 12 months. Fixed-rate mortgage rates hit new lows during September, with 30-year product averaging 3.5 percent and 15-year averaging 2.8 percent that month, according to our Primary Mortgage Market Survey (PMMS)."
The net dollars of home equity converted to cash as part of a refinance, adjusted for consumer-price inflation, remained at a low volume. In the third quarter, an estimated $7.7 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, up from an estimated $5.9 billion in the second quarter, but substantially less than during the peak cash-out refinance volume of $84 billion during the second quarter of 2006.
Among the refinanced loans in Freddie Mac's analysis, the median depreciation of the collateral property was 10 percent over the median prior-loan life of 4.8 years.
"Our Primary Mortgage Market Survey found that 82 percent of loan applications during the third quarter were for refinance, matching the record share of the fourth quarter of 2010," said Nothaft. "Therefore, we have boosted our origination projection for the second half of 2012 to account for the additional refinance activity we expect to see."
Property-value change, loan age, and rate reduction differed between refinancings under the Home Affordable Refinance Program (HARP) and other refinances. For loans refinanced during the third quarter through HARP, the median depreciation in property value was 31 percent, the prior loan had a median age of about 5.6 years (to be eligible for HARP, the prior loan had to be originated before June 1, 2009), and the HARP borrower had an average interest-rate reduction of two percentage points.