Freddie Mac reports that 89 percent of people who refinanced loans owned by the government-backed mortgage repurchaser in the third quarter took cash out — the highest level recorded since 1990.
Although the percentage of people taking cash out when refinancing their homes is up, the total dollar value cashed out declined, because fewer people are refinancing or signing up for new purchase mortgages.
In the third quarter, Freddie Mac saw $82.8 billion cashed out, down from $90.6 billion in the second quarter. Cash-out refinance volume is expected to decline further in the fourth quarter to less than $65 billion, due to lower expected refinance shares overall and lower mortgage origination activity, Freddie officials said in a press release.
Freddie’s Primary Mortgage Market Survey found the share of all mortgage applications that were for refinance slipped for the third consecutive quarter, from 42 percent in the second quarter to 41 percent in the third quarter. The survey classified a refinance as a cash-out if the amount of the new mortgage was at least 5 percent higher than the original mortgage balance.
Half of borrowers who paid of their original loan took out a new one that increased their mortgage coupon rate by 12 percent, the highest ratio since Freddie Mac began compiling the information in 1985. The median appreciation of properties refinanced during the quarter was 33 percent since the time of the original loan, and the median age of the original loan was 3.4 years.
Borrowers with adjustable-rate mortgages have an incentive to refinance into lower-cost ARMs or fixed-rate mortgages, and those who might have considered a prime rate home equity loan for a home improvement or other need are turning to cash-out refinance options now that the prime rate is above 8 percent, Freddie economists said.
“To attract homeowners interested in accessing accumulated home equity but not ready for a refinance of their first-lien mortgage, banks are now starting to offer more creative financing for home-equity lines, with many offering a fixed-rate line of credit option at or below the prime rate,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “These fixed-rate second-lien alternatives, which protect borrowers from future interest-rate increases, may reduce interest in cash-out refinances of existing first-lien fixed-rate mortgages. However, if borrowers are already refinancing to avoid an interest-rate increase on their adjustable-rate mortgage, they may opt to extract a little cash while they are at it.”