Transactions with cashout now represent well over half of all refinances.
Freddie Mac's third quarter Refinance Review showed that 60% of its refinanced loans included cashout -- where the new loan amount was at least 5% more than the principal balance of the original amount. The number sharply contrasts the second quarter's revised figure of 42% and that of 34% a year ago.
"In the latter half of the second quarter and in the first half of the third quarter 30-year, fixed mortgage rates were above six percent, which led to a big falloff in refinance applications," Freddie chief economist Frank Nothaft said in a prepared statement. "The largest decline was in homeowners looking to save money by lowering their mortgage rates, since most mortgages already carry very low rates. However, for cashout refinancers these low rates were a very cost effective way for them to finance a big project such as home improvements or to consolidate and pay off consumer debt."
The third quarter's higher rates reduced the refinance share of mortgage applications to 40%, according to the government-sponsored enterprise. Although refi activity may increase this quarter due to lower rates in recent weeks, the small share of mortgages outstanding with rates above 6.5% make it unlikely that the share will exceed 50% or maintain that level if it does.
The mortgage giant said it expects the 30-year fixed mortgage rate average to stay below six percent throughout early 2005 and end that year at about 6.25%.
Freddie estimated $41 billion in home equity was cashed out during the third quarter, up from $28.5 billion the previous quarter. The secondary lender said it expects Americans to pull out $118 billion in home equity this year. Freddie had initially forecast $114 billion, but then lowered it significantly to $71 billion when it announced the second quarter's cashout results.
On an average loan size of $150,000, homeowners who refinanced their mortgages in the third quarter lowered their rate an average of 0.68 percentage points, according to Freddie deputy chief economist Amy Cutts.
Refinanced properties appreciated 17% in value by the time the refinance loan was made -- up dramatically from 7% in the second quarter and 5% in the third quarter last year, according to the review.
The median age of loans refinanced in the third quarter was 2.6 years from the original loan, or six months older than in the prior quarter, the McLean, Va.-based company reported.
Freddie said the estimates came from a sample of properties on which it has funded at least two successive loans.