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Low Cash-Out Share, Shorter Terms Point to Equity Build-Up

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equity_conceptFreddie Mac recently released the results of its first quarter 2014 quarterly refinance analysis, showing that borrowers will save on net more than $1 billion in interest payments over the coming year as they continue to shorten their payment terms and build equity in their homes.

“Roughly 17 percent of borrowers who refinanced in the first quarter chose to extract home equity versus 14 percent from the same time last year,” says Frank Nothaft, Freddie Mac vice president and chief economist. “This is well below the peak cash-out share of 89 percent the market experienced in the third quarter of 2006. However, even with the slight increase in the cash-out share, it’s still $2 billion less compared to first quarter of last year simply because the refinance share of originations continues to plummet.”

Of borrowers who refinanced during the first quarter of 2014, 39 percent shortened their loan term, up slightly from the previous quarter and the highest since 1992.

In the first quarter, an estimated $6.5 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, largely unchanged from the previous quarter and $2 billion less than the same time one year ago. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006.

In aggregate, U.S. home equity grew by an estimated $2.1 trillion during 2013, according to the Federal Reserve Board’s Flow of Funds data. Much of this gain was attributable to home value gains.

The average mortgage interest rate reduction in the first quarter was about 1.4 percentage points—or a savings of about 24 percent. On a $200,000 loan, that translates into interest savings of about $2,800 during the next 12 months. Homeowners who refinanced through HARP during the first quarter of 2014 benefited from an average mortgage interest rate reduction of 1.6 percentage points and will save an average of $3,200 in interest payments during the first 12 months, or about $260 every month.

About 83 percent of those who refinanced their first-lien home mortgage maintained approximately the same loan amount or lowered their principal balance by paying in additional money at the closing table. The peak was 88 percent during the second quarter of 2012.

The median age of the original loan outstanding before refinance increased to 7.3 years during the first quarter, the most since the analysis began in 1985.

For more information, visit www.freddiemac.com.

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