During the latest quarter, borrowers refinanced into higher rate loans to access home equity -- pushing the share of refinances higher. But the dollar volume of cashout transactions still managed a decline.
In the fourth quarter 2006, 84 percent of refinanced mortgages owned by Freddie Mac included cashout, down from a revised 87 percent in the third quarter, according to an announcement today. In the fourth quarter a year earlier, 81 percent of refinanced loan balances increased by at least five percent.
Meanwhile, the overall refinance share of applications reportedly rose to 46 percent from 41 percent in the third quarter amid the 30-year coming down to 6.2 percent, around where it started the year.
Some borrowers were encouraged to refinance to lower their payments, "for example if they had an adjustable-rate mortgage that was scheduled to reset soon, but the primary driver of refinance continues to be equity extraction," Freddie said.
The median ratio of new-to-old interest rate was 1.06, meaning that one-half of borrowers who refinanced increased their mortgage coupon rate by 6 percent, or about three-eighths of a percentage point, Freddie said.
"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," explained Amy Crews Cutts, Freddie deputy chief economist, in the announcement. "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."
Freddie said it expects 30-fixed mortgage rates to average between 6.3 and 6.5 percent over 2007 and initial rates on 1-year Treasury-indexed ARMs to hover near 5.5 percent.
Cashout volume of $70.7 billion fell 12 percent from the previous three months and is expected to continue declining in 2007, due to lower expected refinance shares overall and lower mortgage origination activity than last year. This, even as many borrowers of the roughly $500 billion in outstanding first-lien adjustable-rate mortgages are expected to refinance this year prior to their payment adjustment.
The median age of the loan from origination to refinance in the fourth quarter was 3.4 years, Freddie reported.