For the past three years, refinancing homeowners have taken out ever-increasing amounts of equity from their homes. In 2000, they pulled out $26.2 billion, a figure that more than tripled in 2001, when it rose to $82.9 billion, according to Freddie Mac. Last year, home equity cash-outs rose again, to $95.7 billion.
But the cash-outs trend may be changing.
Only 32 percent of refinancing homeowners chose to tap their equity for cash during 2003's second quarter, according to Freddie's most recent quarterly report on cash-out refinancings. It represents the lowest percentage of cash-out refinancings in the history of the report, which Freddie began releasing in 1985. Just one year ago, in 2002's second quarter, almost twice that number of refinancing homeowners (63 percent) opted to take cash out of their homes by choosing larger mortgages.
Amy Crews Cutts, deputy chief economist for Freddie Mac, attributes the shift to 2003's historically low interest rates (5.21 percent for a 30-year fixed-rate mortgage in mid-June), which led homeowners to prioritize low monthly payments over cashing out their equity. And, given that these homeowners were refinancing relatively young mortgages (the refinanced loans had a median age of 1.8 years, the second lowest age in the past three years), they may already have taken out whatever equity they wanted.
Now, rising interest rates are affecting the mortgage market in other ways. With 30-year fixed rates pushing 6 percent in early August, refinancing demand has slowed. The level of refinance applications has dropped to one-third of what it was in May and June. The Mortgage Bankers Association of America (MBAA) has revised its origination projections to $3.2 trillion (down from $3.4 trillion) in 2003, solely because of declines in refinance applications.
But Cutts says the activity hasn't dropped as far as she expected, as latecomers do their best to drop their house payments while rates are still historically low. "Refinances only got killed at the 30-year fixed rate, which got relatively expensive," she says. "There's still room to refinance" with ARM, hybrid ARM, and 15-year mortgages, all of which offer lower interest rates than 30-year loans.
Borrowers are thinking the same thing. The share of mortgage loans that are adjustable rate mortgages (ARMs), after hovering in the mid-teens for most of 2003, has spiked to 23 percent. "In terms of dollar volume, ARMs could be as much as one-third" of total originations, says Jay Brinkmann, MBAA's vice president of research and economics.