Reasons Change for Refinancing
Wednesday, May 3, 2006
A greater proportion of mortgage refinancers tapped their home equity for cash in the first three months of this year than in any other quarter in the past 15 years, according to an analysis released yesterday.
About 88 percent of people refinancing their homes took out loans for at least 5 percent more than their original balances, according to the latest quarterly review of loans owned by Freddie Mac, a government-backed home mortgage company. However, more than half took loans at higher interest rates than they previously paid. In years past, refinancers chased lower rates.
The refinancing activity comes as interest rates are rising. By refinancing, some homeowners can get out of adjustable-rate loans on their first or second mortgages or their home-equity lines of credit and switch to fixed-rate loans. It is the first time in more than five years that borrowers as a group are paying higher interest rates after refinancing, according to the report.
"If you are watching and listening, the Fed is telling you interest rates are going to climb," said Amy Crews Cutts, deputy chief economist at Freddie Mac. "Smart consumers are out there making plans about what will happen. . . . They are either consolidating debt, or leaving the table with a check, or both."
"The short story is that everyone has a ton of equity," said Glenn Schwartz, president of Vision Mortgage LLC in Rockville. He said local homeowners are refinancing to arrange fixed-rate mortgages, get cash for home improvements or, in some cases, to buy beach houses.
Ira Rheingold, general counsel of the National Association of Consumer Advocates, said he feared that some people are spending too much of their equity, which could leave them financially exposed.
"I don't want to sound like Chicken Little here, but we're heading for a big fall," Rheingold said. "Our policy of using our homes as our banks is bad public policy, and we need to think of the long-term implications of the debt we have. It's a homeownership economy where people don't really own their homes."
Mortgage brokers say that what has been happening is a last single burst of refinancing activity, particularly by people who have adjustable-rate mortgages and want fixed-rate loans. Adjustable-rate loans usually start out at lower interest rates than fixed loans but can shoot up as rates change.
Mahesh Desai, 38, who sells software, decided that because interest rates were about to rise, it was time to refinance his house in Darnestown. He had a three-year, adjustable-rate loan at 3.625 percent, and he knew from news reports that rates that low were coming to an end.
"I'm still going to have sticker shock in my next payment, but I've enjoyed lower rates for a while," Desai said. "Guess the party's coming to an end."
His new rate is 6.625 percent, and the monthly payment will jump 72 percent. It is an interest-only loan, but he will be pressed to afford the new payment, even without paying down the principal.
"I'm going to work harder and sell more," he said. "I don't have a choice."
The percentage of cash-out refinancings in the first quarter was the highest since the third quarter of 1990, about the time the real estate boom of the late 1980s ended, according to Freddie Mac.
However, the dollar amount of refinancing loans has fallen from when interest rates were lower. Homeowners pulled $59.6 billion in equity out of their homes in the first quarter, down from $70.9 billion in the last quarter of 2005, according to Freddie Mac.
The survey used Freddie Mac data and extrapolated it to the overall market for prime, conventional loans.