Homeowners Putting Up Extra Cash to Refinance
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- Kirk Haverkamp | July 28, 2010
Looking to refinance your mortgage? You might have to bring some cash to the table.
More than one in five borrowers who refinanced first-lien mortgages in the second quarter of the year contributed additional money toward reducing the loan amount, according to figures released today by Freddie Mac. The 22 percent “cash-in” refinance rate is the third-highest reported in 25 years of recordkeeping by the government-supported enterprise.
Cash-out refis at historic lows
Meanwhile, only 27 percent of all refinances during the quarter were “cash-out” refinances where homeowners borrowed against their home equity, increasing their loan balance by at least 5 percent. The share of cash-out refinances over the past three quarters are the lowest since Freddie Mac began keeping records in 1985. By contrast, nearly nine out of 10 refinances were cash-out at the peak of the market in 2006.
Cash-out refinances hit their all-time low in the last quarter of 2009, at only 24 percent of all refinanced mortgages. That’s also when cash-in refis hit their all-time high, with 36 percent of borrowers bringing additional cash to the table.
Both trends are a result of the decline in home values since the peak of the market in 2005-06. Although the steep drops associated with the collapse of the subprime mortgage market in 2008 get the most attention, home values had actually been eroding for some time before that.
Extra cash buys a lower rate
Borrowers who opt for a cash-in refinance may need to reduce their loan balance in order to qualify for a new mortgage, or to obtain a better interest rate than they could get otherwise. Lenders typically give their best rates for refinances where the loan amount is no more than 80 percent of the property’s value; each 5 percent increase in the loan-to-value ratio – 85 percent, 90 percent, 95 percent – means higher rates.
Some homeowners may also need to pay down their mortgages in order to reach benchmarks for refinancing “underwater” mortgages through the federal Making Home Affordable Program – either 105 percent or 125 percent loan-to-value. The former typically allows a borrower to shop around for the best deals; the latter is the highest allowed under the program.
With mortgage rates at their lowest in half a century, many borrowers are finding that paying down their loan balance to qualify for a refinance makes better financial sense than other investments, such as stocks or CDs, according to Frank Nothaft, Freddie Mac chief economist.
Home equity borrowing at 10-year low
The decline in home values has also made it difficult for homeowners to borrow against their home equity to finance home repairs, improvements or other major expenses. All told, homeowners cashed out only $8.3 billion in home equity during the second quarter of the year, the lowest amount since the four quarter of 2000. By contrast, at the peak of the housing boom, homeowners were taking as much as 10 times that amount out of their home equity in a single quarter.
For all mortgage refinances during the second quarter of 2010, the median interest rate reduction was nine-tenths of a percentage point, or a 16 percent reduction in the overall rate. Over the first year of the refinanced loan, that would save a borrower $1,300 on a $200,000 mortgage.
Borrowers who refinanced during the quarter had their previous mortgages for a median of 4.0 years, and had seen a median decline of 5.0 percent in their property values during that time.
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