Refinancing May Be Pumping Billions Into Economy

By: Jann Swanson •
Americans are continuing to cash out equity in their homes according to a report issued this week by Freddie Mac.

During the second quarter of 2005 Freddie reported, 74 percent of its owned loans that were refinanced resulted in new loans that were at least five percent higher than the loans they replaced. This was the highest cash out rate since the fourth quarter of 2000 and was substantially above the rate during the first quarter of 2005 when 64 percent of refinances had higher loans amounts. The report estimated that total equity cashed out in the second quarter was $59 billion as compared to $43 billion the previous quarter.

Applications for refinancing as a percent of all mortgage activity fell in the second quarter to 42 percent from 45 in quarter one. But, according to Amy Crews Cutts, Freddie Mac deputy chief economist, "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."

Ms. Cutts said that she expected cash-outs from refinancing to total $162 billion for the year but, as rates continue to rise, the figure would fall back to $69 billion for the whole of 2006. In 2004 homeowners extracted $140 billion in equity through refinancing their homes. While Ms. Cutts did not draw any parallels, she pointed out that this was close to the amount that the Harvard Joint Center for Housing Studies recently reported that Americans spent last year on home improvements and remodeling.

Homeowners who refinanced during the second quarter lowered their interest rates an average of 0.67 percent which, according to Ms. Cutts, would translate into a savings of about $64 per month on a $150,000 loan. The loans that were refinanced had a median age of 2.6 years, two months more than the median age of loans refinanced during the first quarter.