Freddie Mac: Homeowner demand for home equity loans doubles

Refinance volume falls sharply

Homeowners are taping into their home equity at double the pace due to continual home price increases, pulling more borrowers out from underwater, Freddie Mac’s third-quarter refinance report said.   

However, despite the surge in demand, the dollar volume remains very low at an estimated $8 billion.

The peak in cash-out refinance volume was $84 billion during the second quarter of 2006 ($97 billion in 2013 dollars).

According to Zillow’s latest home value index of $176,500, the rate of annual home-value appreciation peaked at 8.1% in April and has fallen in every month since. U.S. home values were up 6.5% year-over-year at the end of the third quarter. 

"While the share of borrowers that cashed-out some equity has increased considerably over the past year, the refinance volume has also fallen sharply, resulting in a relatively small amount of equity cashed-out, to the tune of roughly $8 billion which is less than one-tenth of what we saw at the peak in mid-2006,” said Frank Nothaft, Freddie Mac vice president and chief economist.

The good news, to put it into numbers, those that lowered their payment by refinancing into a cheaper mortgage rate will save more than $1.5 billion in interest payments over the next 12 months of their new loan.

“On average, that's an interest rate reduction of about 1.3 percentage points — a savings of about 24% On a $200,000 loan, that translates into mortgage interest savings on average of about $2,700 during the next 12 months," Nothaft said.

Additional quick facts from Freddie Mac:

  • The report found that of borrowers who refinanced during the third quarter of 2014, 36% shortened their loan term, a 4% decline from the previous quarter. From 1990 through 2013, on average 28% of borrowers shortened their term. 
  • About 72% of those who refinanced their first-lien home mortgage maintained approximately the same loan amount or lowered their principal balance by paying in additional money at the closing table, unchanged from the previous quarter. Twenty-eight percent 'cashed-out' some equity, the highest share in five years; the peak on 'cash-out' share was 89% during the second and third quarters of 2006. 
  • The median age of the original loan outstanding before refinance was 7 years during the third quarter. The median age was 7 years or older in each of the last four quarters, the most since the analysis began in 1985.
  • In the second quarter, an estimated $8.0 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, up from the revised $5.6 billion last quarter. Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997. 

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