Freddie Mac reported last week that in the first quarter of 2006, 88% of Freddie-owned loans were refinanced into new mortgages with loan amounts that were at least 5% higher than the original loan. This compares to 81% in 4Q05, and is the highest since the third quarter of 1990, according to Freddie Mac.
In 1Q06, mortgage rates were on an upward trend. After falling to a low of 6.10% in mid-January, the 30-year fixed rate ended the quarter at 6.35%. Apparently, rising mortgage rates that were still relatively attractive encouraged borrowers to act, particularly to consolidate home equity lines of credit that were tied to the prime rate.
Freddie's Chief Economist Frank Nothaft noted that at this point, borrowers are not refinancing to reduce their mortgage rates. "In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers," he stated. Interest rates on most home-equity lines of credit have been driven upward by the Federal Reserve increasing short-term interest rates in January and March, which resulted in the rise in prime rates. This is why homeowners might be willing to increase the mortgage rate on their first-lien mortgage. Nothaft explained that home-equity loans are usually linked to the prime rate - which is now at 7.75% - adding that many home-equity loans have rates that are 1% more than the prime rate. By contrast, the average 30-year fixed-rate is currently close to 6.5%.
The median ratio of old-to-new interest rate was 0.98. This means that one-half of the borrowers' old loan rate was at least 2% lower than their new loan rate. The quarterly survey also reported that property refinanced in the first quarter had a median home price appreciation of 30%, compared to 29% in the first quarter. The median age of the original loan was 3.0 years, up from 2.9 years in the fourth quarter.
Currently, Freddie Mac estimates that home equity extraction in 2006 will total $170 billion compared to $244 billion in 2005. The firm also forecasts that $170 billion in home equity will be converted into cash from the refinancing of first-lien, prime, conventional mortgages in 2006. Although more refi borrowers will be looking to cash-out their home-equity this year, Freddie Mac predicts that the number of refinancings will be less and home price appreciation would be slower compared to last year.
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