The percentage of borrowers who took cash out when refinancing loans with Freddie Mac dropped slightly in the fourth quarter, as did the dollar volume of cash-out refinances.
Cash-out refinance volume is expected to continue on a downward trend in 2007, due to an expected drop in the share of refinance loans and overall origination activity, said Amy Crews Cutts, Freddie Mac deputy chief economist.
Some 84 percent of borrowers who refinanced ended up with mortgages that were at least 5 percent higher than their original balances, Freddie Mac said, down from 87 percent in the third quarter. Cash-out refinances totaled $70.7 billion, down from $80.2 billion in the previous quarter.
In the fourth quarter of 2006, the median ratio of new-to-old interest rate was 1.06, meaning that half of borrowers who refinanced increased their mortgage coupon rate by 6 percent.
“With interest rates averaging 6.2 percent in the fourth quarter for 30-year fixed-rate mortgages, many families found it cost effective to cash out equity through a new first mortgage even though it raised their rate,” Crews Cutts said in a statement. “With the prime rate at 8.25 percent, a home equity loan or line of credit based on that rate may not make sense if the financing need is large, like a major home improvement or college tuition payments, and will be paid back over several years.”
In the fourth quarter of 2006, 30-year fixed mortgage rates averaged 6.2 percent, 40 basis points lower than in the third quarter. Freddie Mac expects 30-fixed mortgage rates to average between 6.3 percent and 6.5 percent in 2007.
“While interest rates are expected to be flat or up slightly in 2007, there are roughly $500 billion in outstanding first-lien adjustable-rate mortgages that will see a monthly payment increase due to an interest-rate reset, the start of amortization, or both,” Crews Cutts said. Other homeowners have second liens that adjust each month depending on changes in the prime rate, she said, and Freddie Mac expects that many borrowers facing payment increases this year will refinance those loans.
Freddie Mac’s quarterly Cash-Out Refinance Report also revealed slowing home-price appreciation. Properties refinanced during the fourth quarter of 2006 experienced a median house-price appreciation of 28 percent over the life of the loan, down from 33 percent in the third quarter of 2006. The median age of the original loan was 3.4 years — about a month longer than the median duration of loans refinanced in the previous quarter.