Lower than Expected Interest Rates Boost Cash-Out Refinance Activity

MCLEAN, Va. – Continuing low interest rates are spurring higher than expected cash-out refinance activity, Freddie Mac reports. In the second quarter of 2005, 74% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances. This compares to the first quarter of the year when 64% of refinanced loans had higher new loan amounts, and was the highest since the fourth quarter of 2000. According to Freddie Mac VP and Chief Economist Frank Nothaft, interest rates on 30-year, fixed-rate mortgages dipped lower in the second quarter. Mortgage borrowers took advantage of these low rates by cashing out some home equity before rates go up as they are expected to in coming quarters. Freddie Mac Deputy Chief Economist Amy Crews Cutts said that while applications for refinance fell in the second quarter of 2005 to 42%, down from the first quarter average of 45%, “the second-quarter cash-out refinance volume reflects, in part, borrowers responding to the fact that they may not be able to obtain such favorable rates in the future to fund home improvements or other big purchases. The strong cash-out activity was due to both borrowers who were going to do a cash-out refi regardless of interest rate incentives and those who were primarily attracted by the low rates but decided to convert some equity into cash while they were at it.” Based on Freddie Mac’s estimates, the company says the amount of home equity cashed-out through prime, first-lien refinances to total $162 billion in 2005 and about $69 billion in 2006. Total equity cashed-out in the second quarter is estimated at $59 billion, up from the revised cash-out estimate for the first quarter of 2005 of $43 billion. The median loan refinanced in the second quarter 2005 was 2.6 years old, two months older than in the first quarter. Homes refinanced during the second quarter had appreciated a median of 23% since the original loan was made, compared to a 17% appreciation on loans refinanced in the first quarter. In the second quarter of 2005, the median ratio of old-to-new interest rate was 1.08. That means that one-half of those borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was at least 8% higher than the new interest rate. Also in the second quarter of 2005, Freddie Mac reported that homeowners who refinanced their mortgages lowered their rate an average of 0.67 percentage points. Freddie Mac said it expects home sales to hit a new record in 2005 “as low fixed mortgage rates combined with teaser discounts on adjustable-rate mortgages maintain affordability, even as home prices rise.” The Government Sponsored Enterprise expects 30-year fixed mortgage rates to rise through the end of the year, ending with a fourth quarter average near 6%. -