Freddie Mac released its quarterly refinance review for the fourth quarter of 2005 last week and reported that 80% of Freddie-owned loans that were refinanced resulted in new mortgages with loan amounts at least 5% higher than the original loan. This compares to 73% in the third quarter, and is at its highest level since the third quarter of 2000 when it was at 81%.
Freddie Mac's chief economist Frank Nothaft said that while mortgage rates increased sharply in the fourth quarter, most borrowers were extracting home equity rather than trying to reduce monthly payments. One major reason for this, he said, is homeowners are consolidating their home equity loan payments that have been increasing as a result of the Federal Open Market Committee rate hikes.
Homeowners who refinanced their fixed-rate loans lowered their interest rate by an average of 35 basis points. The savings is minimal on the monthly payment, about $34 per month on a $150,000 loan.
"The interest-rate savings are not a primary driver of the decision to refinance a fixed-rate mortgage in the current environment," said Freddie's deputy chief economist Amy Crews Cutts. "Now, the dominant refinance borrower is looking at the best way to consolidate debt or finance a big project such as a home improvement."
The median appreciation of the refinanced property was 27%, up from 24% in the third quarter.
Freddie estimates home equity extraction from refinancings totaled $243 billion last year. It expects this to fall sharply in 2006, to about $117 billion.
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