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Cashouts Continue

Freddie survey indicates cashout on 72% of refinances

November 2, 2005

By MortgageDaily.com staff

Cashout activity in the third quarter maintained its pace and is expected to continue in high demand amidst falling refinance volume and rising rates.

Freddie Mac announced its third quarter Refinance Review indicated 72% of its owned refinance loans included cashout of at least five percent of the original mortgage. The share is unchanged from the revised second quarter, but much higher than 59% in the third quarter a year earlier.

The estimates were reportedly derived from a sample of properties on which Freddie has funded at least two successive loans.

Extraction of home equity through prime first-lien refinances of $60.4 billion was just $0.3 billion below the revised total in the second quarter, Freddie reported.

"The sharp rise in the cost of home equity lines of credit and the expectation that mortgage interest rates will go higher over the next year induced homeowners to look towards the refinancing option to extract home equity for home improvements or other investment purposes now," Freddie chief economist Frank Nothaft said in a written statement.

During the third quarter, interest rates for 30-year fixed-rate mortgages reportedly averaged 5.76%, compared to a 6.75% average in the prime rate, key to home equity lending and lines of credit.

The refi share of mortgage applications was a strong 44% in the third quarter, Freddie said.

"With the expectation that mortgage rates will rise further in the fourth quarter, refinance volumes overall should slow but cash-out refis will continue to be in demand," Freddie said.

For the year, Freddie expects home equity extraction of $204 billion -- about 44% above last year. In 2006, the number is estimated at $114 billion.

The "borrowers who have an incentive to refinance will largely be those seeking to exchange home equity for cash or those who are hitting the adjustment period on their adjustable-rate mortgages," the secondary lender added.

Properties refinanced during the third quarter experienced a median house-price appreciation of 23% during the time since the original loan was made, unchanged from the previous three-month period, according to the announcement.

The median age of original loans refinanced was reported at 2.6 years, one month older than the median age of refinances during the second quarter.

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