Are borrowers taking aim at lowering their debt? Recent reports give evidence that exactly this could be on the minds of borrowers as they apply for mortgage refinancing.
According to the latest results of Freddie Mac's 4th quarter 2010 cash-out refinance analysis, 46 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at closing.
Borrowers are seeking refinancing to take advantage of historically low interest rates, and in many cases to reduce monthly payments in hopes of avoiding foreclosure. According to Frank Notehaft, Freddie Mac Chief Economist, Early in the fourth quarter mortgage rates on 30-year fixed-rate conforming loans were at very low levels, the likes of which haven’t been seen in more than 50 years. This encouraged borrowers who could do so to refinance, and many looked at their other investment options and chose to pay down a bit of their mortgage at the same time.
Freddie reports that the median interest rate reduction was about 1.25 percentage points, or a savings of 22 percent in interest costs. Over the first year of the refinance loan life, these borrowers will save over $1,850 in principal and interest payments on a $200,000 loan.
Consumers are generally shedding debt, and mortgages are just another way they’re doing it. Between 2007 and the third quarter of 2010, mortgage debt declined more than $400 billion, according to the Fed. The estimated volume of net equity cashed out in our report do not account for the homeowners who have paid off their mortgages in their entirety, says Notehaft.
The recent onslaught on cash-in borrowers is the highest share since Freddie Mac began reporting refinancing patterns in 1985.
Conversely, borrowers who increased their loan balance by at least five percent made up just 16 percent of refinancings. The average over the past 25 years has been 62 percent.
In dollar terms, fourth quarter results gave an estimated $6.8 billion worth of equity being cashed out, as opposed to $8.2 billion for the third quarter.
These findings are welcome news for proponents of modifications in the nation's spending.