82% of Refinancing Homeowners in U.S. Maintain or Reduce Mortgage Debt in 3Q

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Based on Freddie Mac's third quarter refinance analysis, homeowners who refinance continue to strengthen their fiscal house by maintaining or reducing their mortgage debt.

In the third quarter of 2011, 82 percent of homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Of these borrowers, 44 percent maintained about the same loan amount, and 37 percent of refinancing homeowners reduced their principal balance.

"Cash-out" borrowers, those that increased their loan balance by at least five percent, represented 18 percent of all refinance loans; the average cash-out share during the 1985 to 2010 period was 46 percent.

The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.2 percentage points, or a decline of about 22 percent in interest rate. Over the first year of the refinance loan life, these borrowers will save about $2,500 in interest payments on a $200,000 loan.

The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 16 years (third quarter of 1995). In the third quarter, an estimated $5.3 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $6.3 billion in the second quarter and substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006.

Among the refinanced loans in Freddie Mac's analysis, the median value change of the collateral property was a negative 7 percent over the median prior loan life of almost five years. In comparison, the Freddie Mac House Price Index shows about a 25 percent decline in its U.S. series between September 2006 and September 2011. Thus, borrowers who refinanced in the third quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years.

Frank Nothaft, Freddie Mac vice president and chief economist tells the World Property Channel, "The typical borrower who refinanced reduced their interest rate by about 1.2 percentage points. On a $200,000 loan, that translates into saving $2,500 in interest during the next 12 months."

Nothaft further comments, "Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 60 years to lock in interest savings. Fixed-rate mortgage rates hit new lows during September, with 30-year product averaging 4.11 percent and 15-year averaging 3.32 percent that month, according to our Primary Mortgage Market Survey."

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