There has been a small trend into more money last quarter, but over in the last few years people have taken less money out.
Why Home Refi Boom Is Different This Time
By Diana Olick | CNBC – Wed, Oct 10, 2012 2:27 PM EDT
U.S. home owners are refinancing their mortgages at the fastest clip since 2005, but the difference now is they are putting cash in, not taking it out.
At the going rate, 25 percent of all first-lien U.S. mortgages will be refinanced this year, according to LPS Applied Analytics. That represents about $7.1 billion -just through June of this year – in savings on monthly payments, according to economists at Freddie Mac, who ran the numbers for this report.
Seven years ago, refinancing wasn’t about saving on monthly payments; it was about pulling cash out. Homeowners extracted close to a trillion dollars collectively in home equity in 2005 and largely put it toward home remodeling, swimming pools, cars, vacations and retail spending.
Today, 81 percent of homeowners refinancing their first-lien mortgages either kept the same loan amount or lowered their principal balance by paying-in additional money at closing, according to Freddie Mac.
“The net dollars of home equity converted to cash as part of a refinance, adjusted for consumer-price inflation, was at the lowest level in 17 years,” the Freddie report notes. Rather than build debt, they reduced it.
Refinances are surging this year, not just because interest rates are hitting new record lows but because the government is making severely underwater loans eligible for refinance.
The Home Affordable Refinance Program, which involves loans backed by Fannie Mae and Freddie Mac, used to cap negative equity, but this year that cap was removed, putting thousands more loans into the refi machine. So far more than half a million loans were refinanced through HARP since the beginning of this year.
Politicians and housing advocates claim that all the savings from these record low interest rates and the ensuing refinances is going back into the economy, but that does not appear to be the case.
Given the research from Freddie Mac, a quick, non-scientific survey of small lenders and brokers, produced similar findings:
Craig Strent/Apex Home Loans, Maryland: Homeowners, particularly older ones that have already met their financial planning goals, are taking the savings and just putting it back in the loan, meaning they are lowering their rates, but continuing to pay the same amount on the new loan that they were paying on the previous loan. This accelerates their payoff and decreases the interest they pay, though arguably with an opportunity cost given how cheap the money is.
Dan Green/Waterstone Mortgage, Ohio: Not all households are choosing to reduce payments. Many are choosing to reduce term. At today’s rates, the first payment of a 15-year mortgage is comprised of 67 percent principal. To get that point on a 30-year mortgage would take 18 years. More homeowners are asking about amortization schedules, and the benefits of paying extra principal each month. There’s more talk of saving than spending.
Julian Hebron/RPM Mortgage, California: Refi to lower payment, but keep making previous payment to pay loan down faster. Example: If you use our average loan of $550,000 and super-conforming rates of 3.5 percent now vs. 4.5 percent a year ago, a borrower’s payment drops from $2,787 to $2,429 (this factors in the paydown of $550,000 to $541,000 over 12 months). If a borrower keeps making old payment on new loan, thereby paying loan down by an extra $358 per month, they cut 6 years (or 20 percent) off a 30-year term.
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Proprietary OC Housing News home purchase analysis
18110 BIRD Ct Fountain Valley, CA 92708
$449,000 …….. Asking Price
$645,000 ………. Purchase Price
8/19/2005 ………. Purchase Date
($196,000) ………. Gross Gain (Loss)
($51,600) ………… Commissions and Costs at 8%
============================================
($247,600) ………. Net Gain (Loss)
============================================
-30.4% ………. Gross Percent Change
-38.4% ………. Net Percent Change
-5.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$449,000 …….. Asking Price
$15,715 ………… 3.5% Down FHA Financing
3.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$433,285 …….. Mortgage
$122,410 ………. Income Requirement
$1,922 ………… Monthly Mortgage Payment
$389 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$112 ………… Homeowners Insurance at 0.3%
$451 ………… Private Mortgage Insurance
$288 ………… Homeowners Association Fees
============================================
$3,162 ………. Monthly Cash Outlays
($283) ………. Tax Savings
($694) ………. Equity Hidden in Payment
$17 ………….. Lost Income to Down Payment
$76 ………….. Maintenance and Replacement Reserves
============================================
$2,278 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,990 ………… Furnishing and Move In at 1% + $1,500
$5,990 ………… Closing Costs at 1% + $1,500
$4,333 ………… Interest Points
$15,715 ………… Down Payment
============================================
$32,028 ………. Total Cash Costs
$34,900 ………. Emergency Cash Reserves
============================================
$66,928 ………. Total Savings Needed
The property above is available for sale on the MLS.
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