Savvy, equity-saving home owners push 'cash-in' refinances to record levels

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One in three home owners who refinanced their loan in the fourth quarter of 2009, lowered their principal balance -- the highest "cash-in" refinance share since Freddie Mac began tracking the data.

by Broderick Perkins
© 2010 DeadlineNews.Com



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Deadline Newsroom - Refinancing home owners are putting money back into their home at record levels to help plug their equity drain.

One in three home owners who refinanced their loan in the fourth quarter of 2009, lowered their principal balance. That's the highest "cash-in" refinance share since Freddie Mac's quarterly Refinance Report began tracking the data.

On par with the cash-in share, the report showed that the share of "cash-out" borrowers who, to the contrary, increased their loan balance by 5 percent or more represented a record low, 27 percent share.

The last record low cash-out share was 33 percent, during the second quarter of 2003, just before the last housing boom began.

The data is the latest available from the refinance report, but home owners are expected to continue the trend in the soft economy.

"The cash-out loan has been steadily heading towards extinction as funding for this once popular consumer-spending-friendly loan has fallen to the lowest level since 1985 as consumers struggle to restore their household balance sheets," said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

When a home owner completes a cash-in refinance, he or she takes a check to the closing. That can help a home owner surface an underwater mortgage -- a mortgage balance that's larger than the home is worth.

It can also free up more equity for a rainy day, make the home easier to sell and, in some cases, give a boost to the credit score, due to the smaller mortgage balance.

Once market home value appreciation resumes sufficiently, the cash-in deal can also be considered an investment, perhaps with a better return than other investments.

It's a smart move in tough economic times.

In a cash-out refinance, on the other hand, the home owner walks away with a check and that drains equity.

"This transformation from a cash-out refinance market to a cash-in refinance market is consistent with other data we've seen on households reducing their overall debt burdens, particularly revolving credit like credit cards," said Frank Nothaft, Freddie Mac vice president and chief economist.

All refinancing borrowers are also enjoying near record low interest rates, which helps make a refinance cheaper and easier to land.

During the last quarter of 2009, mortgage interest rates dropped to a record low of 4.71 percent for conforming, fixed-rate, 30 year mortgages and averaged 4.9 percent. During the first quarter this year, rates averaged 5 percent, according to Freddie Mac.

"One-half of borrowers who refinanced their conventional loan during the last quarter of 2009 lowered their annual mortgage interest rate by at least 0.9 percentage points below the old rate. For families that paid down their mortgage balances when they refinanced, the monthly payment savings are even greater," said Nothaft.

In addition to boosting equity, some refinancing home owners also bring money to the table to avoid mortgage insurance (required on loans with a loan-to-value greater than 80 percent) and to avoid higher jumbo loan rates.

The trend shift from cash-out to cash-in loans isn't always due to financial foresight.

"Falling home prices as well as the virtual disappearance of no-cost loans (no point-no fee loans) have contributed greatly to the cash-in trend," Osborne added.

Home owners attempting a refinance for a lower rate, find their home doesn't appraise as high as they thought. The extra cash is necessary to qualify for the refinance.

"The main causes of the decline in cash-out refinance are declining home prices in many areas of the country that have eliminated equity that could have been extracted and tighter underwriting standards for loan-to-value ratios. Among the refinanced loans in our database, the median appreciation of the collateral property was a negative 2 percent over the median life of the prior loan of 3.6 years," explained Amy Crews Cutts, Freddie Mac deputy chief economist.

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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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