Monday, February 15, 2010

Home equity till empty for many homeowners

Gone is the practice of using home equity like an ATM. Lost home values and job uncertainty is forcing homeowners to lower their mortgage bill and leave in place what little home equity they have left.

by Broderick Perkins
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Deadline Newsroom - Lost home values and job uncertainty is forcing homeowners to lower their mortgage bill and leave in place what little home equity they have left.

In the fourth quarter 2009, the share of "cash-out" refinancing dropped to the lowest level since Freddie Mac started tracking the statistic -- 27 percent.

Likewise the number of borrowers who refinanced their mortgage to lower their principal balance -- on a "cash-in" basis -- also hit a record 33 percent.

That's in stark contrast to the heyday of skyrocketing home equity levels during 2006 and 2007 when as many as 88 percent of homeowners refinancing took cash out and as few as 4 percent refinanced on a cash-in basis to lower their principal or payment.

Since then, home values have crashed by as much as 50 percent or more in some areas and many of those cash-out homeowners are living with upside down mortgages -- loans larger than their home is worth.

In the fourth quarter of 2009, the median appreciation of refinanced property was a negative two percent.

Other homeowners are among the millions suffering foreclosure, short sales or other types of financially transmitted distress.

Freddie Mac says the cash-in share of refinancings is the highest it's been since 1985. The cash-out share is the lowest it's been since 2003 when the record was 33 percent.

"One half of borrowers who refinanced their conventional loan during the (fourth) quarter (2009) lowered their annual mortgage interest rate by at least 0.9 percentage points below the old rate. In aggregate, the lower interest rate translates into about $2 billion in payment savings for these homeowners over the first 12 months of the new loan. For families that paid down their mortgage balances when they refinanced, the monthly payment savings are even greater," said Frank Nothaft, Freddie Mac vice president and chief economist.

A 1 percentage point reduction in a mortgage rate would mean a savings of about $300 a month on a $500,000 mortgage initially financed at 6 percent.

"This transformation from a cash-out refi market to a cash-in refi market is consistent with other data we've seen on households reducing their overall debt burdens, particularly revolving credit like credit cards. From September of 2008 to November of 2009, consumers cut $100 billion dollars in revolving debt from their obligations, according to the Federal Reserve Board," Nothaft said.

Financial experts have always advised tapping home equity through a refinance or home equity loan, is by it's very nature, an equity-depleting loan. Use it and lose it.

The best home equity use is to reinvest it.

The best investments include certain home improvements, education for the kids, new business finances, a second home and other financial moves that provide an equal or better return on your money than the cost of the loan.

"Home equity use has been the equivalent of home equity abuse over the past several decades," says Nancy Osborne, chief operating officer of, a Santa Clara, CA-based financial information publisher and interest rate tracker.

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.

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