Home owners refinancing to cash out continue to drain greater pools of equity from their home often at a greater cost than their original mortgage.
But many of them take the hint to pay off equity loans with ever increasing rates that have begun to squeeze their household budget and could become more expensive than the new loans.
Freddie Mac said in the second quarter this year, 88 percent of home owners who refinanced loans did so to sign for a new mortgage with a balance at least five percent higher than the original loan, up from 86 percent during the first quarter.
That doesn't mean consumer spending is on a rampage, to the contrary.
Many consumers are circling the wagons.
The Lusk Center for Real Estate at the University of Southern California recently said consumers are actually cooling their heels on spending, buying fewer homes and the things that go in them, because of higher energy and fuel prices, increases in interest rates and a "compression in home equity" as home price appreciation has stalled in many markets.
The growth in cash-out refi levels is not so much a panic run on equity as it is an indication that home owners may be wisely creating a financial safety barrier to ward off blows from the tighter fisted money market. The share of all refinanced mortgages slipped in the second quarter this year, for the second consecutive quarter to 42 percent from 44 percent in the first quarter Freddie Mac says.
Rather than squandering equity, home owners are tapping the value of their homes to put a ceiling on their spending.
"The incentive to take cash out of home equity is partially driven by the rapid rise in short-term interest rates like the prime rate. Many borrowers have seen their rates on home equity lines of credit -- which are tied to the prime rate -- rise. Now they are consolidating those HELOC loans into a new first lien mortgage to reduce their mortgage payments," said Amy Crew Cutts, Freddie Mac's deputy chief economist.
On average, home equity loan interest rates have cracked the 8 percent barrier, while first mortgages remain below 7 percent.
When adjustable rate mortgages (ARMs), as the first or second mortgage, are refinanced with fixed rates, that stops the rise in the cost of financing caused by the ARMs' adjustments. With hybrid mortgages that are fixed for one, three, five, seven or 10 years, the rise stops for what the home owner hopes is a manageable period.
Freddie Mac said one-half of borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was nearly seven percent lower than the new interest rate. However, the higher interest rate on the new loan, could ultimately be lower than the old ARM's maximum, eventual cap.
Indeed some home owners with less job security risk the new mortgage could wind up too costly, but many home owners have enough equity back up to absorb that risk. Properties refinanced during the second quarter of 2006 experienced a median house-price appreciation of 33 percent during the time since the original loan was made, up from 31 percent in the first quarter 2006.
"Borrowers who are looking for an inexpensive way to finance home improvements or business investments, or to consolidate high cost debt, are turning to cash-out refinance. These borrowers are often willing to refinance into higher rates on their first lien mortgages," Cutts said.
