A full 74 percent of Freddie Mac-owned loans that were refinanced in this year’s second quarter resulted in new mortgages with loan amounts at least 5 percent higher than the original mortgage balances, the mortgage giant reported today.
Lower than expected interest rates in this year’s second quarter spurred the spate of cash-out refinancings, Freddie Mac said.
This is in contrast to the first quarter of 2005, when 64 percent of refinanced loans had higher new loan amounts, and was the highest since the fourth quarter of 2000, Freddie Mac said.
“Interest rates on 30-year, fixed-rate mortgages dipped lower in the second quarter, spurring refinance activity higher,” said Frank Nothaft, Freddie Mac vice president and chief economist, in a statement. “Mortgage borrowers took advantage of these low rates by cashing out some home equity before rates go up as they are expected to in coming quarters.”
Freddie Mac expects home sales to hit a new record again in 2005 as low fixed mortgage rates combined with teaser discounts on adjustable-rate mortgages maintain affordability, even as home prices rise, the company said.
“The Fed’s statements regarding expectations of a continued measured pace of increase in the federal funds rate (a key short-term interest rate), while signaling the Fed’s vigilance on inflation containment, means that rising mortgage rates should start to dampen enthusiasm in the housing market later this year,” said Nothaft.
Freddie Mac expects 30-year fixed mortgage rates to rise through the end of the year, ending with a fourth quarter average near 6 percent, approximately a quarter of a percentage point higher than the second-quarter average, the company said.
“Applications for refinance fell in the second quarter of 2005 to 42 percent, down from the first quarter average of 45 percent,” said Amy Crews Cutts, Freddie Mac deputy chief economist.
“The second-quarter cash-out refinance volume reflects, in part, borrowers responding to the fact that they may not be able to obtain such favorable rates in the future to fund home improvements or other big purchases,” the deputy chief economist said.
“The strong cash-out activity was due to both borrowers who were going to do a cash-out refi regardless of interest rate incentives and those who were primarily attracted by the low rates but decided to convert some equity into cash while they were at it,” Cutts said.
Based on Freddie Mac’s July outlook for mortgage originations and refi activity over the next two years, the company estimates the amount of home equity cashed-out through prime, first-lien refinances to total $162 billion in 2005 and about $69 billion in 2006, Cutts said.
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