Seeking Cash, at a Lower Cost

CHICAGO -- People looking to extract equity from their homes have increasingly been turning to cash-out refinancing, industry observers say.

A big reason that people are tapping their equity through refinancing comes down to dollars and cents, according to Amy Crews Cutts, deputy chief economist with Freddie Mac. Because home-equity loans and lines of credit are most often tied to the prime rate, now at 8.25 percent, those options have gotten more expensive even as long-term mortgage rates have remained relatively low, with the 30-year loan averaging about 6.25 percent.

"It's all about the prime rate," said Michael Kodsi, chief executive of Choice Mortgage Bank in Boca Raton, Fla. A good number of his clients would rather take cash out through refinancing -- whereby their mortgage rate will be fixed -- than take out a loan tied to the prime rate, which has the potential to fluctuate and "could go higher down the road," he said.

Freddie Mac said 89 percent of the loans it owns that were refinanced in the third quarter of 2006 had loan amounts at least 5 percent higher than the original mortgage balances, the threshold for considering a loan to be a cash-out refinancing. It's the highest share of cash-out refinance loans reported since 1990.

Consumers cashed out a total of $82.8 billion during the quarter, down from $90.6 billion in the second quarter, according to Freddie Mac.

Banks are seeing results of the cash-out trend, too.

"Banks have been reporting that they have not been getting the business of home-equity lines as they had been before," Cutts said.

According to the American Bankers Association, the dollar amount of home-equity loans (including loans made through home-equity lines of credit) increased by an annualized 14.6 percent for the first three quarters of 2006, compared with all of 2005. That's down from a 17.4 percent increase in 2005 and a 31.2 percent increase in 2004.

The "easy money" in 2004 was an effect of a prime rate at about 4 percent, said Keith Leggett, senior economist for the bankers association. But as the Fed raised rates, thereby raising the prime rate, that easy money dried up.

"What's happening [is], you're starting to see the impact of higher interest rates," he said. "As interest rates rose, that . . . translated into basically a slowing in the rate of growth in home-equity lines and home-equity loans."

Some homeowners aren't refinancing only to get at their equity. Instead, they're taking "passive" cash-outs, refinancing for a better rate, perhaps in response to a higher reset rate for an adjustable-rate mortgage, Cutts said.

In fact, those facing ARM resets seem to be the driving force behind an upswing in refinancing that started late last year, said Mike Fratantoni, senior economist at the Mortgage Bankers Association.