Borrowers who refinanced during the fourth quarter did so primarily to cash out home equity rather than to secure lower interest rates, according to Freddie Mac’s quarterly refinance review.

In the fourth quarter of 2003, 45 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least 5 percent higher in amount than the original mortgages. This is in contrast to the third quarter of 2003, when an upwardly adjusted 34 percent of refinanced loans had higher new loan amounts. A year ago, when fixed-rate mortgages were still falling, 40 percent of refinanced loans were for cash out, but the number of loans being refinanced was considerably higher.

“The atmosphere around refinancing changed in the fourth quarter as mortgage rates started rising from the 45-year lows of the summer. Since most of those who could refinance for lower rates have already done so, the later-year market became more attractive primarily to those who want or need to take equity out of their homes,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “Additionally, as mortgage rates began creeping upwards, the rate of refinancing began to drop off from the record highs that we experienced earlier in the year.”

Freddie Mac expects real gross domestic product growth to be about 4.5 percent, and economic expansion at that rate should be enough to gradually draw down the unemployment rate to about 5.5 percent during the last quarter of 2004. With both inflation and mortgage rates expected to remain low in 2004, we continue to see a strong housing market for the year ahead.

“Over the fourth quarter of 2003, homeowners who refinanced their mortgages lowered their rate on average 1 percentage point,” Cutts said. “On an average loan size of $150,000, that lower rate translates into a payment that is about $100 a month lower for a savings of more than $1,200 annually.”

The review also revealed that properties refinanced during the fourth quarter 2003 experienced a median house-price appreciation of 12 percent during the time since the original loan was made, similar to the 11 percent appreciation for loans refinanced in fourth quarter 2002.

Freddie Mac is a stockholder-owned corporation that purchases mortgages from lenders and packages them into securities that are sold to investors.


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