Fewer borrowers cashing out on home equity

As more borrowers took advantage of government-sponsored refinancing programs, a recent report indicates that a growing number of homeowners who refinance were able to significantly reduce their mortgage debt during the fourth quarter.

As more borrowers took advantage of government-sponsored refinancing programs, a recent report indicates that a growing number of homeowners who refinance were able to significantly reduce their mortgage debt during the fourth quarter.

According to the report released by Freddie Mac, 85 percent of borrower who refinanced the mortgage on their first-lien home were able to reduce their principal or maintain the same loan amount. This was achieved as more refinancing borrowers chose to make additional payments at closing.

"The typical borrower who refinanced reduced their interest rate by about 1.4 percentage points. On a $200,000 loan, that translates into saving $2,700 in interest during the next 12 months," said Freddie Mac vice president and chief economist Frank Nothaft.

Meanwhile, of the borrowers who chose to refinance, mortgage records show that 37 percent were able to maintain the same loan amount, while 49 percent managed to reduce their principal balance. The 49 percent, of cash-in borrowers was the highest rate recorded in 26 years.

However, cash-out borrowers - or borrowers who increased their mortgage balance by at least 5 percent - accounted for a 15 percent share of refinancing activity. This is also the lowest the rate has been in 26 years. According to the GSE, the average number of cash-out borrowers accounted for a 46 percent share of refinancing activity.   

Additionally, the net dollars, adjusted for inflation, on the amount of equity converted into cash reached its lowest level in 16 years. The report showed that during the fourth quarter, $5.5 billion worth of equity was chased out by borrowers. 

"Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 60 years to lock in interest savings," said Nothaft. "Fixed-rate mortgage rates hit new lows during December, with 30-year product averaging 3.96 percent and 15-year averaging 3.25 percent that month, according to our Primary Mortgage Market Survey."

In order to allow more borrowers to access these affordable mortgage rates, President Barack Obama recently announced an initiative to make the road to refinancing easier for qualified homeowners. According to the White House, if approved by Congress, this initiative could save some American households as much as $3,000 a year in mortgage payments.



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