Americans continue to refinance with new loans the same size or smaller than the loans they are replacing. Freddie Mac's third quarter refinance analysis shows that 54 percent of homeowners who refinanced during the third quarter of 2012 took new loans of approximately the same size as the old and 29 percent brought funds to the table to reduce their mortgage balance. The aggregate 83 percent is only slightly below the record 85 percent of non-cash out borrowers in the fourth quarter of 2011.
The 17 percent of homeowners who took out a new loan more than 5 percent larger than the old loan, Freddie Mac's definition of a cash-out refinancing, is the same as in the second quarter and the third quarter of 2011. These numbers are a vast departure from cash-out percentages during the period from Q4 2005 to Q3 2007 which always exceeded 80 percent.
Homeowners who refinanced reduced their interest rate by an average of 1.7 percentage points or a savings of about 31 percent in interest rate, the largest percent reduction in the 27 years Freddie Mac has been tracking the data.
The net dollars of home equity converted to cash as part of a refinance, adjusted for consumer-price inflation, remained at a low volume. In the third quarter, an estimated $7.7 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, up from an estimated $5.9 billion in the second quarter, but substantially less than during the peak cash-out refinance volume of $84 billion during the second quarter of 2006. An additional $8.7 billion was added to loan balances due to consolidation of second mortgages or home equity lines of credit.
The median age of the loans that were refinanced was 4.8 years compared to 5.1 years in the previous quarter. Freddie Mac found that the median appreciation of the collateral property over the life of the old loan was -10 percent, down from -16 percent in the second quarter but double the rate one year earlier. Collateral appreciation has been negative since the third quarter of 2009.
Many of the loan metrics differed between refinancing done under the Home Affordable Refinance Program (HARP) and other refinances. The median collateral appreciation of HARP refinanced loans was -31 percent over a prior loan life of 5.6 years and the average HARP borrower had an interest rate reduction of 2 percentage points.
Frank Nothaft, Freddie Mac vice president and chief economist said, "On average, borrowers who refinanced reduced their interest rate by about 1.7 percentage points. On a $200,000 loan, that translates into saving about $3,500 in interest during the next 12 months. Fixed-rate mortgage rates hit new lows during September, with 30-year product averaging 3.5 percent and 15-year averaging 2.8 percent that month, according to our Primary Mortgage Market Survey®".
Nothaft said the Survey also found that 82 percent of loan applications during the third quarter were for refinance, matching the record share of the fourth quarter of 2010 so Freddie Mac has boosted its origination projection for the second half of 2012 to account for the additional refinance activity expected.
