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.