NEW YORK (MainStreet) -- Fewer homeowners than at any time since the economic crisis are taking cash out of their home refinancing deals, reflecting the ongoing struggles in the U.S. housing market.

It’s all about lower home values, leaner household budgets and tighter lending standards--issues homeowners and banks hope will improve by next year.

Cash-out refinancing used to be popular with new mortgage borrowers. According to government-sponsored lender Fannie Mae (Stock Quote: FNM), 46% of all primary mortgages from 1985 through 2010 had cash-out deals included. In the second quarter of this year only 23% of borrowers included a cash-out provision in their refinancing deals.

The additional cash people are taking out is scraping the bottom of the barrel, too. FNMA reports an average of 5% over the loan amount being taken out as cash. The housing lender also reports that:

  • 26% of refinancing borrowers actually cut the size of their mortgage loan balance with a new mortgage deal.
  • The average refinancing customer during that quarter knocked 1% off of his or her loan interest rate.
  • On a $200,000 mortgage, the average borrower saved about $1,550 during the first year of his or her new mortgage deal.

Cash-out arrangements enable mortgage customers to get some additional liquidity from their homes beyond the mortgage balance amount. Such deals can be expensive for borrowers as they add to the loan balance and monthly loan payments.

These deals don’t always come via refinancing. They can also kick in through a home equity line of credit to get more cash tied to their home loan deals, too.

But these days FNMA says that the age-old saying that real estate is all about “location, location, location” has been replaced with “cut, cut, cut," which explains why cash-out refinancing loans are in decline.

“This is primarily a ‘rate-and-term’ market, meaning that the typical homeowner is looking to cut their interest rate or shorten their loan term,” explains Frank Nothaft, Freddie Mac's chief economist. “More than three in four borrowers are keeping their loan balance about the same or reducing their loan balance when they refinance.”

Besides opting out of cash-out deals, FNMA says that mortgage refinance customers are getting some of the best interest rate deals in recent history.

“Savvy homeowners are taking advantage of some of the lowest fixed-rate [mortgages] in more than 50 years to lock in interest savings,” adds Nothaft. “Over the first half of 2011, fixed-rate mortgage rates hit a low during June, with 30-year products averaging 4.50% and 15-year averaging 3.68% over the last four weeks of June, according to our survey.”

Lowered cash-out activity is important because it impacts the economy on two fronts:

  • It takes money away from banks and lenders, who will likely attempt to make up the losses in other areas by issuing higher borrowing rates or service fees.
  • It provides more stability for homeowners, who owe less on their home loans without a cash-out provision.

Any way banks can make a buck, they’ll go for it. And any way consumers can save a buck, they’ll go for it, too. It’s the second point that’s changing the mortgage landscape, and given the ongoing economic crunch, it’s a behavior that likely won’t change for awhile.

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