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Low rates prompting more 'cash-in' refinances

Jan. 25 (Bloomberg) -- Nicolas Retsinas, director emeritus of the Joint Center for Housing Studies at Harvard University, talks about the outlook for the U.S. housing market and mortgage foreclosures. U.S. home prices have reached a bottom and may be set to rise in the first half as buyers take advantage of increased affordability, said Karl Case, the economist who co-founded the S&P/Case-Shiller home price index. Retsinas talks with Pimm Fox on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

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Washington Post Staff Writer
Tuesday, February 1, 2011; 8:01 PM

A record number of homeowners are kicking in cash when they refinance their mortgages, in most cases to qualify for interest rates that are now near historic lows, mortgage financier Freddie Mac reported this week.

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In the fourth quarter, 46 percent of borrowers who refinanced their primary mortgages brought cash to settlement to lower the balance on their loans, Freddie Mac said. That's the highest share of so-called "cash-in" refinances since the company started tracking the numbers in 1985.

Borrowers, in essence, are buying peace of mind about their debts by moving to more affordable mortgages and, according to the firm, coming out ahead by using cash that's earning little interest in the bank to realize significant savings on their monthly loan payments.

"It turns out to be an easy calculation for many people," said Frank Nothaft, Freddie Mac's chief economist.

The trend marks a sharp reversal from the days of the housing boom, before the mortgage meltdown. Back then, people pulled cash out of their homes to pay for vacations and other expenses. The deals peaked in 2006, when an estimated 86 percent of prime borrowers with non-government backed loans cashed out a record $318 billion.

The "cash-out" deals fizzled out when home values plunged. Last year, borrowers cashed out only $32 billion, the lowest volume since 1997 when adjusted for inflation, Freddie Mac said. By contrast, cash in refinances have climbed every year since 1997.

Low interest rates are one of the main drivers behind the jump. The average rate on a 30-year fixed-rate mortgage hit a low of 4.17 percent in mid-November. It has hovered in the high 4 percent range since then, averaging 4.8 percent last week. With rates expected to rise further this year, it's no wonder borrowers are eager to refinance.

"Over the course of the past 18 months, we've done about 4,000 cash-in refinances and I'd say that borrowers were bringing cash to the deal in more than half of these," said Erika Tucker, a real estate attorney at Monarch Title, a Washington area firm.

Some borrowers did so out of necessity. With values tumbling, many homeowners owed more on their mortgages than their homes were worth. They could not refinance without coughing up cash.

"The cash-in deals are a by-product of the negative equity many borrowers have in their current homes," said Greg McBride, a senior financial analyst at Bankrate.com.

Then there are people such as Mark Lenhart, 43. He and his partner wrote a check for $20,000 to refinance their D.C. condominium in December.

The couple had an adjustable-rate mortgage that was due to reset this month and then every year thereafter. Concerned about the prospect of rising rates, they wanted to refinance into a 30-year fixed-rate loan. But they did not have the 5 percent equity needed to qualify, which is why they paid down their loan balance.

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