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Why Home Refinancing Boom Is Different This Time




By Diana Olick, CNBC Correspondent

NEW YORK ( CNBC) -- U.S. home owners are refinancing their mortgages at the fastest clip since 2005, but the difference now is they are putting cash in, not taking it out.

At the going rate, 25% of all first-lien U.S. mortgages will be refinanced this year, according to LPS Applied Analytics. That represents about $7.1 billion -- just through June of this year -- in savings on monthly payments, according to economists at Freddie Mac, who ran the numbers for this report.

Seven years ago, refinancing wasn't about saving on monthly payments; it was about pulling cash out. Homeowners extracted close to a trillion dollars collectively in home equity in 2005 and largely put it toward home remodeling, swimming pools, cars, vacations and retail spending.

Today, 81% of homeowners refinancing their first-lien mortgages either kept the same loan amount or lowered their principal balance by paying-in additional money at closing, according to Freddie Mac.

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"The net dollars of home equity converted to cash as part of a refinance, adjusted for consumer-price inflation, was at the lowest level in 17 years," the Freddie report notes. Rather than build debt, they reduced it.

Refinances are surging this year, not just because interest rates are hitting new record lows but because the government is making severely underwater loans eligible for refinance.

The Home Affordable Refinance Program, which involves loans backed by Fannie Mae and Freddie Mac, used to cap negative equity, but this year that cap was removed, putting thousands more loans into the refi machine. So far more than half a million loans were refinanced through HARP since the beginning of this year.

Politicians and housing advocates claim that all the savings from these record low interest rates and the ensuing refinances is going back into the economy, but that does not appear to be the case.

Given the research from Freddie Mac, a quick, non-scientific survey of small lenders and brokers, produced similar findings:

Craig Strent/Apex Home Loans, Maryland: Homeowners, particularly older ones that have already met their financial planning goals, are taking the savings and just putting it back in the loan, meaning they are lowering their rates, but continuing to pay the same amount on the new loan that they were paying on the previous loan. This accelerates their payoff and decreases the interest they pay, though arguably with an opportunity cost given how cheap the money is.
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