Cash Out Refinancing Lowdown

Cash out Refinance market is booming! Should we be alarmed?

Now more and more Americans are going in for Cash out Refinancing to meet their immediate cash requirements. Therefore what we are soon going to have is a population that is heavily in debt. Is this good? Note for instance that this spring Freddie Mac, the U.S. mortgage market's second-largest financier experienced a downpour of cash out refinancing requests. It now has the largest market share of 88% which is the highest that it has seen in the last 16 years. The company reported that homeowners drained at least $81 billion in home equity this way during this year's second quarter.

More alarming is the fact that the most of this refinance is being done at a rate that is higher than the old mortgage rate. This is probably being done either because all of sudden there is a lot of demand for that extra cash or simply because the applicants feel that the rate of interest is going to go further up. By getting their house refinanced at this stage, they feel that they could enjoy the benefit of a relatively lower rate of interest if they act now. Statesman reports:

"The hard thing, of course, is telling the difference between the smart, savvy people out there, the people who are not, and the people who are but have bad luck — they lose their job, one of their kids gets a horrible illness, there's a death in the family, or something else that rocks the boat," Cutts said.

The Changing Face of Cash-Outs

Cash-out refinancings are at an all-time high, but that’s not the real news here. Even the fact that more and more people are using this option as a way to gain some extra “spending” money is not new. While the money may go towards something as critical like settling outstanding debts or be used for something as frivolous as a once-in-a-lifetime vacation, the real news is that people are willing to pay a higher interest on the replacement loan.

Freddie Mac, the mortgage investment company, reports that most refinancers are choosing bigger replacement first mortgages with interest rates that average one-half of a percentage point higher than their old loans.

The difference in cash-out refinances effected today and those in practice three years ago is that refinancers in the present are opting for new balances and interest rates that are higher. The economic and financial scenario has also undergone a drastic change – short-term interest rates have risen to 8.25 from 4 percent in 2003 and 2004, and thirty-year fixed-rate first mortgages are touching 7 percent from 5 percent three years ago.

Refinancing Stronger Than Ever

Freddie Mac, the second-largest mortgage finance and home funding company in the U.S., reported that loan refinancing in the second quarter this year had touched a 16-year high of 88 percent. The new loans were at least 5 percent higher than the original balances owed by Freddie Mac’s consumers.

Refinancing activity has been stronger than usual because of the incentives being provided to consumers to cash out on their home equity, says Frank Nothaft, Freddie Mac vice president and chief economist.

Amy Crews Cutts, Freddie Mac's deputy chief economist, expects cash out activity to remain strong throughout the remainder of the year, in proportion to the slow but gradual rise of interest rates. More home equities are taken out due to the rise in short-term interest rates such as the prime rate, she adds. 

The company’s quarterly finance review pegged the percentage of consumers taking cash out of home equity in the first quarter at 86. As much as $81 billion was cashed out during the second quarter of 2006, an increase from the $74.1 billion cashed out during the first quarter, according to Freddie Mac.

Cash-Out Refinance Fraud

The Federal Bureau of Investigation (FBI) arrested Donna June Baker and Lana Mixon on charges of federal mortgage fraud, for using a fake identity to buy and refinance a house. Baker used the identity of a pensioner to buy a home in Atlanta for $1 million, in September last year. She then used the same identity to refinance the property with the First Bank of America.

She doctored the pensioner’s income to show a figure of $23,000 more than he earned each month and cooked up false bank documents and assets in an attempt to gain $100,000 from the scam.
Hampton was arrested on charges of abetting and supporting Baker in falsifying the documents. The duo is scheduled to appear before a US Magistrate Judge in February.

Refinancing to dip sharply in 2006

Economists predict a rise in interest rate of thirty-year mortgages and annual appreciation of house values to dip into single digits. However they all agree that all this could only serve to stabilize the home market and would eventually be a good thing in the long run.

According to Frank Nothaft of Freddie Mac, refinancing activity will dip sharply. Mortgage originations will be down about 14 to 15 percent in 2006. Most of that will be the decline in refinancing, especially in cash-out refinancing that allows homeowners to pull cash from their equity for other spending.

Read: Rise in 30-year rates, dip in appreciation expected

Refinancing Interest-Only Loans

Interest-only loans are loans marketed as an innovative mortgage product. But, if you have not paid any principal payments you could eventually end up owing more than the equity in their homes if housing prices take a nosedive.

Short-term interest rates have been rising and it is this rate that is used to set the rates for interest-only loans and other adjustable-rate mortgages. Which means that it's going to be expensive to refinance into a new interest-only loan from the exisisting one.

Therefore if you plan to move home soon and if you foresee an increase in your pay in a few years it might be a good idea to go in for refinancing in an interest-only loan. Interest-only borrowers reaching the end of their term should consult a mortgage broker before taking on refinancing another interest-only loan.

It is simply foolish to keep expecting the house value to move up forever. Considering that interest rates are even now relatively low, refinancing into a fixed rate loan might still be a good idea. So, when house values finally drop, you would be in a better state when it comes to the equity in your home.

Kei Matsuda, senior economist for San Francisco-based Union Bank of California, said if interest rates rise gradually and an interest-only borrower's income rises steadily or the value of the property goes up, then that borrower can continue to refinance into another interest-only loan. Refinancing mechanism will break if mortgage rates skyrocket and people can no longer qualify for a new loan.

More on refinancing interest-only loans: Here

Homeowners go for Cash Out Refinancing

The US homeowners will turn a record $204 billion of real-estate equity into cash this year by refinancing mortgages. They will do so at higher balances to tap gains in rising property values. In cash out refinancing, homeowners borrow money when the value of their property rises. Cash out refinancing is all set to climb higher as compared to the previous years. The current trend suggests that the US economy will get more support from the housing sector.

Generally homeowners use money from cash-out refinancing to renovate houses, buy cars or other items. They also use the money to pay for college tuition fees or reduce their credit-card debt. The rise in cash out refinancing has been attributed to the rise in home prices. Detroit Free Press reports:

Mortgage-refinancing volume rose from $307 billion in the previous three months to $332.2 billion in the third quarter as the average rate for a 30-year fixed mortgage climbed from 5.7% to 5.8%, Nothaft said. In 2006, the rate probably will average 6.2%, up from 5.8% this year, he said.

U.S. Mortgage Applications Fall to Lowest

US mortgage applications fell last week to the lowest level since April 2005. It has become well known that higher mortgage rates affected the demand for homes and slowed refinancing. The average rate on a 30-year fixed mortgage jumped to 6.21 percent. It is the highest rate since June 2004. Economists believe that going by the current trends, it seems that decline in housing sector may put negative impact on the economy.

New purchase and refinancing activity are crumbling for the first time. While housing activity remains relatively high and continues to contribute to economic growth, it will quickly fade as mortgage rates continue to rise. The index of both purchases and refinancing was the lowest at 644.5. bloomberg.com reports:

While refinance applications fell, the share of total applications rose to 43.6 percent from 42.5 percent. The percentage of people seeking adjustable-rate mortgages fell last week to 29.4 percent from 29.5 percent.

Investors helped Herald Media to Cash Out

Some investment firms have helped Herald Media Inc. buy a block of suburban newspapers in Greater Boston. They want to cash out their remaining investment. According to Boston Herald sources, it will seek other lenders to replace the investment from the three firms -- Audax Group, Weston Presidio, and Halyard Capital, a subsidiary of the Bank of Montreal -- over the next two months. The firms financed Herald Media's purchase of a chain of 100 suburban newspapers, mostly weeklies, from Fidelity Investments in 2001.

In July 2004, Boston Herald publisher Patrick J. Purcell refinanced $155 million of the original debt through a package with Wachovia Corp. That allowed him to repay about 85 percent of the principal investment to Audax, Weston Presidio, and Halyard. Purcell declined to say how much Herald still owes those firms. He said the investors always had a ''time horizon" of three to five years on the Herald deal. boston.com reports:

The Herald said in a press release that it had retained Wachovia Capital Markets LLC and Dirks, Van Essen & Murray as financial advisers to focus on ''recapitalizing the company's existing equity and debt and to explore new strategic opportunities. "Newspaper analyst John Morton, president of Morton Research Inc., Silver Spring, Md., said the investors may have decided the economic climate for newspapers is weakening.

Village Board to refinance Debt

The Northbrook Village Board is planning to restructure nearly half of the village's debt. It expects that a lot more revenue will soon be coming in. The cash influx from the refinancing is intended to give the Village Board flexibility as it budgets in the future, officials said. The Board agreed to refinance about $21 million in debt over 16 years. When the bonds are all issued, the average term of village bonds will jump from 10.7 years to about 12.7 years.

The new bonds, to be sold over the next four years, will give the village $7.7 million in extra cash flow by 2011. But it costs about $5.3 million in interest over the debt's life. The extra cash now can help Northbrook attract businesses and increase revenues. pcmag.com reports:

Northbrook's bond counsel, John Peterson, told trustees he doesn't expect the refinancing to affect Northbrook's Aaa bond rating. It will leave the village with about $56 million in debt, about 2.3 percent of the town's equalized assessed value, and bond rating agencies don't get nervous until debt hits 5 percent, Peterson said.

Cashing in on Home Equity

It is being noticed that Americans are changing their attitudes towards mortgage debt. Refinancing is an all-time high and many people are cashing out their home equity. Home equity loan is one of the few factors responsible for fuelling the nation’s economic growth. The rising home prices can be attributed to the real estate investments financed by home equity.

These loans are mostly used to pay off the credit card balances. Also, the home equity loans are used to cover up the education expenses, which are sometimes very high and not easy to afford. The main reason behind the rise in mortgage debt is the skyrocketing growth in prices of houses. It allows the homeowners to cash out their home equity and keep the balance amount. baltimoresun.com reports:

Should mortgage rates rise sharply or home prices fall, many homeowners could face financial turmoil. They might be unable to service their loans or could find that their homes are worth less than their mortgages.

Read More: Owners cash in on home equity