It's never been cheaper to borrow money to buy a house, but when it comes to refinancing more borrowers are choosing to pay down their mortgage principal rather than increase it by borrowing against their home's equity.
Borrowers that contributed additional cash to pay down their mortgage principal when refinancing tied for the second-highest rate in 25 years, according to the latest Freddie Mac
During Q210, 22% of homeowners that refinanced their first-lien mortgage paid down part of their principal balance during the process. The cash-in rate peaked at 36% in Q409, and the Q210 rate ties Q204 for the second highest since Freddie Mac began tracking the data in 1985. The rate was 19% in Q110 and 16% in Q209.
According to separate monthly volume reports from April to June
, Freddie Mac's total refinance volume was $54.6bn during Q210, down nearly 60% from $134.5bn during Q209.
Freddie Mac generates the refinance data by taking a sampling of properties where it has funded two successive loans and the second loan is for refinancing rather than purchase.
The Freddie Mac weekly survey of mortgage rates put the average interest rate for 30-year fixed-rate mortgages (FRMs) at 5.08% at the beginning of Q210
. Rates peaked at 5.21%
during the second week in April and hit the 5% threshold
during the first week of May. Since then, weekly rates have fluctuated, sometimes setting new records, and never topping 5%
The greatest percentage of borrowers are opting to borrow less by cashing in during their refinance. Freddie Mac vice president and chief economist said there is a logical explanation for the trend.
“Interest rates on fixed-rate mortgages are at 50-year lows, making refinancing attractive if borrowers qualify," Nothaft said. "Similar rates on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves."
“If you pay down your mortgage balance you save the interest you would pay on the loan — about 4.6% at today’s rates," Nothaft said, adding that it's a better option for borrowers compared to earning a percentage point or less in certificates of deposit (CDs) and money markets and lacks the riskiness of stock market investments, which have not performed well in the past couple of years.
Declining property values may be another factor that has more borrowers paying down mortgage principal. A borrower may want to refinance to take advantage of low rates, but need a lower loan-to-value (LTV) ratio or meet other underwriting standards to complete the deal.
In Freddie's sample pool of mortgages, the median change in value of the refinanced properties was a depreciation of 5% in Q210, up from a depreciation of 4% in Q110 and appreciation of 1% in Q209.
Since 2002, the median change has always been appreciation in value, peaking at 34% in Q206. But since the median change was flat in Q309, the rate of depreciation increased every quarter. That decrease in value is decreasing the refinance borrowers on the other end of the market — "cash out" borrowers that increase their loan balance by at least 5%.
The rate of cash-out refinancers reached a record low of 24% in Q409, increased to 28% in Q110 and declined slightly to 27% in Q210. Since 2002, the cash-out rate peaked at 88% in Q206 and Q306, and was 37% in Q209.
With more borrowers paying down their principal during a refinance and fewer borrowing additional funds, the net home equity converted to cash was at its lowest level in 10 years, Freddie Mac said — $8.3bn in Q210, compared to $8.4bn in Q110 and $21.9bn in Q209.
When borrowers refinanced in Q210, they got a median interest rate reduction of 90 basis points (bps), a 16% discount that will save borrowers more than $1,300 over the life of a $200,000 loan, Freddie said. That's unchanged from Q110, but less than the median discount of 125 bps in Q209.
Write to Austin Kilgore