Freddie Mac has released the results of its Q4 refinance analysis showing homeowners who refinance continue to strengthen their fiscal house, as 84 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 the fourth quarter of 2011. Of these borrowers, 46 percent maintained about the same loan amount, and 39 percent of refinancing homeowners reduced their principal balance.
"On average, borrowers who refinanced reduced their interest rate by about 1.8 percentage points," said Frank Nothaft, Freddie Mac vice president and chief economist. "On a $200,000 loan, that translates into saving about $3,600 in interest during the next 12 months. Fixed-rate mortgage rates hit new lows during December, with 30-year product averaging 3.4 percent and 15-year averaging 2.7 percent that month, according to our Primary Mortgage Market Survey."
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 fourth quarter, an estimated $8.1 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from an estimated $8.2 billion in the third quarter and substantially less than during the peak cash-out refinance volume of $84 billion during the second quarter of 2006.
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 fourth quarter through HARP, the median depreciation in property value was 29 percent, the prior loan had a median age of about 5.9 years (to be eligible for HARP, the prior loan had to be originated before June 1, 2009), and the HARP borrower with a 30-year fixed-rate refinance (no product change) had an average interest-rate reduction of 2.0 percentage points.
"While all borrowers that refinance have benefitted, HARP has enabled many borrowers that traditionally would not have had access to refinance to obtain low rates and significantly reduce their interest rate and monthly payment," said Nothaft. "This increases the likelihood that these borrowers will continue to perform on their loan and remain homeowners."
For all other (non-HARP) refinances during the fourth quarter, the median property had very little (zero percent) change in property value between the dates of placement of the old loan and the new refinance loan, the prior loan had a median age of 3.7 years, and borrowers who refinanced a 30-year fixed-rate into the same product had an average interest-rate decline of 1.5 percentage points.
In the 10 largest metropolitan areas, those that experienced the more severe property value declines tended to have older loans, very little cash-out, and larger percentage declines in mortgage rate. For example, borrowers that refinanced in the Detroit metro area (and had experienced a 37 percent decline in property value between placement of loans) paid off loans that were about 7.4 years old, cashed-out equity in only seven percent of loans, and reduced their mortgage rate by 30 percent. In contrast, borrowers that refinanced in the Boston metro area (and had about four percent value decline) paid off loans that were 2.9 years old, cashed-out equity in 19 percent of loans, and had reduced their mortgage rate by 24 percent.