Freddie Mac has released the results of its second quarter 2014 quarterly refinance analysis, showing that borrowers will save in aggregate more than $1 billion in interest payments over the coming year, as borrowers continued to shorten their payment terms and build equity in their homes.
Of borrowers who refinanced during the second quarter of 2014, 40 percent shortened their loan term, approximately the same as the previous quarter and the highest since 1992. In the second quarter, an estimated $7.8 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, up from the revised $5 billion last quarter. Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997.
"The housing market realized a significant shift in the second quarter of this year as refinance activity fell below 50 percent marking the onset of the first purchase-dominated market the industry has seen since 2000 and an end to the refinance boom that started in late 2008," said Frank Nothaft, Freddie Mac vice president and chief economist. "In this time we saw fixed mortgage rates hit all-time lows, with the 30-year fixed-rate mortgage falling well below four percent."
In aggregate, U.S. home equity grew by an estimated $4.1 trillion during the two-year period through March 31, 2014. Much of this gain was attributable to home value gains.
The average mortgage interest rate reduction in the second quarter was about 1.4 percentage points—or a savings of about 24 percent. On a $200,000 loan, that translates into interest savings of about $2,800 during the next 12 months. Homeowners who refinanced through the Home Affordable Refinance Program (HARP) during the second quarter of 2014 benefited from an average mortgage interest rate reduction of 1.6 percentage points and will save an average of $3,200 in interest payments during the first 12 months, or about $260 every month.
"We also estimate over 25 million American borrowers refinanced their loans to the tune of over $70 billion in total interest payment savings," said Nothaft. "However, since 2008 homeowners cashed-out approximately $215 billion in home equity, adjusted for inflation. The low level of cash-out refinance volume in the second quarter, despite the estimated $2.8 billion increase over last quarter, reflects how much home equity was lost during the Great Recession. Even with recent home price gains and rock-bottom interest rates, American households are not cashing out equity at rates we've seen historically. Regardless of the minimal level of cash-out refinance activity, when we couple it with lower mortgage rates and shorter terms homeowners have taken out through refinance over the past couple years, they have accelerated principal pay down and contributed to the rebound in home-equity accumulation."
About 79 percent of those who refinanced their first-lien home mortgage maintained approximately the same loan amount or lowered their principal balance by paying in additional money at the closing table, down four percent from the previous quarter. The peak was 88 percent during the second quarter of 2012.
The median age of the original loan outstanding before refinance increased to 7.3 years during the first quarter, the most since the analysis began in 1985 and unchanged from the previous quarter.