Thirty Three Percent of U.S. Homeowners Who Refinanced in Q-3 Paid Down Debt

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According to Freddie Mac's (OTC: FMCC) latest third quarter cash-out refinance analysis, 33 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at the closing table. This is the second highest "cash-in" share since Freddie Mac began keeping records on refinancing patterns in 1985. The revised cash-in share in the second quarter was 23 percent.

"Cash-out" borrowers, those that increased their loan balance by at least 5 percent, represented 18 percent of all refinance loans; this is the lowest cash-out share since the analysis began in 1985. The higher cash-in share in combination with low cash-out refinancing activity brought the net dollars of home equity converted to cash to the lowest level in 10 years. In the third quarter, an estimated $7.4 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $9.4 billion in the second quarter and less than 10 percent of the peak cash-out volume of $84 billion in the second quarter of 2006.

Freddie Mac's chief economist Frank Nothaft said, "Interest rates on 30-year fixed-rate mortgages dropped during the third quarter to levels not seen since the early 1950s. Borrowers are responding to the low rates, with over 80 percent of new loan applicants looking for a refinance."

The main causes of the decline in cash-out refinancing were reduced home prices, tighter underwriting standards for loan-to-value ratios, and borrowers' desire to pay down debt. Among the refinanced loans in Freddie Mac's analysis, the median appreciation of the collateral property was a negative 3 percent over the median prior loan life of 3.8 years.

The median interest rate reduction was about 1 percentage point, or at least 18 percent. Over the first year of the refinance loan life, these borrowers will save over $1,400 in principal and interest payments on a $200,000 loan.

Nothaft further commented, "When rates fall to new lows we typically see more 'rate and term' refinancers, who are looking only to reduce their interest payments, and relatively fewer cash-out borrowers. But now we're also seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession, with non-mortgage consumer debt falling more than 5 percent since 2008, according to the Fed."

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