Share Of Home Refinancings Taking Cash Out Grows As Overall Refi Levels Begin To Wane In Fourth Quarter 2003
February 5, 2004
Homeowners No Longer Looking Primarily For Lower Mortgage Rates
McLean, VA ? In the fourth quarter of 2003, 45 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least five percent higher in amount than the original mortgages, according to Freddie Mac's quarterly refinance review. 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 (GDP) 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.
"With interest rate still averaging well below 6 percent, homeowners are using cash out refinancing as an affordable way to finance purchases of durable goods, home improvements and to pay down other forms of consumer debt," stated Cutts. "In 2003, homeowners put over $100 billion worth of improvements and additions into their homes, contributing to the growth in home values and pushing the total value of homeowner equity to a new high of $7.9 trillion by the third quarter of 2003.
"In the fourth quarter, the median ratio of old-to-new interest rate was 1.22. In other words, at least half of those who paid off their original loan and took out a new one had an interest rate on their old loan that was 22 percent higher than the new interest rate.
"Over the fourth quarter of 2003, homeowners who refinanced their mortgages lowered their rate on average 1.0 percentage points. On an average loan size of $150,000, that lower rate translates into a payment that is about $100.00 a month lower for a savings of more than $1,200 annually. In aggregate, the monthly savings from reduced interest costs to households that refinanced in 2003 adds up to more than $1.6 billion.
"In 2003, homeowners who refinanced converted almost $139 billion in home equity into cash, but rising home values put that equity right back in and then some," said Cutts.
Freddie Mac's Conventional Mortgage Home Price Index shows the cumulative growth in the value of housing, on a national average, to be about 40 percent over the past 5 years. Freddie Mac's economists expect home prices to rise at a slightly faster pace in 2004 as the economy gains a stronger footing but interest rates remain affordable.
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.
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to ensure that the latest loan is for refinance rather than home purchase. The Freddie Mac analysis does not track the use of funds made available from these refinances.
Source: Freddie Mac
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