In the second quarter of 2010, 22 percent of homeowners who refinanced their first-lien mortgage used the extra cash to pay down their principal, also known as “cash-in” refinancing, according to Freddie Mac.
That ties the record for the third highest cash-in share since Freddie Mac started keeping such records in 1985.
It also means that fewer borrowers are doing the reverse and “cashing-out” – or raising their loan balances and keeping the extra cash at closing.
“Interest rates on fixed-rate mortgages are at 50-year lows, making refinancing attractive if borrowers qualify, and similarly rates on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves,” said Frank Nothaft, Freddie Mac vice president and chief economist.
Cash-out borrowers, those who increased their balance by at least 5 percent, represented 27 percent of all refinance loans in the second quarter, Freddie Mac reported.
The cash-out share over the last three quarters are the lowest since the refinancing analysis began 25 years ago.
The higher cash-in share means that net dollars of home equity converted into cash is at the lowest level in 10 years.
In the second quarter, $8.3 billion in home equity was cashed out during the refinancing of conventional, prime-credit home mortgages, compared with $8.4 million in the first quarter.
In the second quarter, the median interest-rate reduction was about nine-tenths of a percentage point, or at least 16 percent.
“Over the first year of the refinance loan life, these borrowers will save over $1,300 in principal and interest payments on a $200,000 loan,” Freddie Mac reported.
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