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Freddie Mac Reports Cash-In Refinancings Jumped to 22% in Second Quarter

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Frank Nothaft

According to a new report this week from Freddie Mac (OTC: FMCC), cash-out refinancing rose in the second quarter of 2010.

Frank Nothaft, Freddie Mac vice president and chief economist stated, "Interest rates on fixed-rate mortgages are at 50-year lows, making refinancing attractive if borrowers qualify, and similarly rates on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves.

Some of the key facts of their report include:

  • In the second quarter of 2010, 22 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at the closing table. This ties the record for the third highest "cash-in" share since Freddie Mac began keeping records on refinancing patterns in 1985. The revised cash-in share in the first quarter was 19 percent.
  • "Cash-out" borrowers, those that increased their loan balance by at least 5 percent, represented 27 percent of all refinance loans; the cash-out shares over the last three quarters were the lowest since the analysis began in 1985. The higher cash-in share in combination with low cash-out refinancing activity brought the net dollars of home equity converted to cash to the lowest level in 10 years. In the second quarter, $8.3 billion in home equity was cashed out during the refinance of conventional prime-credit home mortgages vs. $8.4 billion in the first quarter.
  • The main causes of the decline in cash-out refinancing were reduced home prices and tighter underwriting standards for loan-to-value ratios. Among the refinanced loans in Freddie Mac's analysis, the median appreciation of the collateral property was a negative 5 percent over the median prior loan life of 4.0 years.
  • The median interest rate reduction was about nine-tenths of a percentage point, or at least 16 percent. Over the first year of the refinance loan life, these borrowers will save over $1,300 in principal and interest payments on a $200,000 loan.

Nothaft further commented, "If you pay down your mortgage balance you save the interest you would pay on the loan, about 4.6 percent at today's rates, over the life of the loan versus earning a percentage point or less in CDs and money markets and without the riskiness of stock market investments, which have not performed well in the past couple of years either."

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