Cash-Out Refinance Surge Rages On

Americans are getting one more cash advance from their homes, and they’re doing it with cash-out refinancing.

That term refers to Florida home mortgages big enough not just to cover debt, but deliver some immediate cash to the borrower. This spring, the burgeoning cash-out refi trend grew rapidly, comprising the highest market-share percentage in 16 years — 88 percent of all mortgages refinanced through Freddie Mac, the government-backed mortgage buyer.

According to Freddie Mac, homeowners drained $81 billion in home equity that way in the second fiscal quarter of this year alone. The price of quick cash obtained via these means: at least 5 percent additional Florida mortgage debt, and the loss of loans that were a median 7 percent lower.

IMMEDIATE NEEDS… OR NOT

So why refinance a Florida home loan when interest rates are higher? A lot of reasons. Amy Crews Cutts, Freddie Mac’s deputy chief economist, says that people are either very serious about getting cash out for a home improvement or business, or they’re foreseeing a reset down the line and want to change now into something that will be cheaper.

Undeniably, reseting rates are a looming issue for anyone with an adjustable-rate loan. Since adjustable-rate mortgages offer low introductory monthly payments, then reset to higher costs after the teaser-rate term expires, many owners are looking at bigger monthly payments in the not-too-distant future.

Such Florida mortgage options have been wildly popular in recent years because they allow people to buy earlier (or more) than they otherwise could.

“About $500 billion in ARMs are scheduled to reset this year. It’s clear when they reset that payments will be higher. Borrowers are pretty savvy. If their credit’s in good condition, they’ve got a job, they might say, ‘Let’s refinance today,’” Cutts said.

WHO’S AHEAD OF THE GAME?

“The hard thing,” Cutts adds, “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.”

Recent data shows many consumers are biting their nails. TrueCredit.com found that 27 percent of poll respondents worry about meeting mortgage payments going forward.

“We knew rising rates were starting to squeeze people, but it’s a little shocking that it’s so high,” said Luci Duni, Director of Consumer Education for the San Luis Obispo, Calif., organization. “Estimate how long it takes to break even, based on your refinance costs. If you plan to stay in your home longer than that, then it’s a good thing.”

Her advice? Cut down on spending, improve your credit score, and consider the costs and benefits of mortgage refinancing.

A PARADIGM SHIFT

Some people already have ample equity, which is not surprising seeing that U.S. home values rose 57 percent in the five years, according to the Office of Federal Housing Enterprise Oversight (OFHEO). That advance, tied to the nation’s housing boom, has substantially changed public attitudes about the meaning of home.

“Consumers have been looking at home equity as their Tooth Fairy. All of us are financially engineering our housing,” said Stephen LaDue, President and CEO of Affiliated Mortgage & Financial Corp. in Wauwatosa, Wis. “All these people not only have a reset, but lots of equity. They say, ‘I need a new deck, or a kitchen remodel. Might as well pull cash out and do it now.’ Their wages are stagnant, but they have all this wealth from their home.”

Future prospects for extracting equity don’t seem as good.

The nation’s housing boom is over, with resale prices climbing only 3.7 percent in the fiscal year ending June 30, the National Association of Realtors reports. Thousands of homeowners are now left with big debts and little home equity, according to the Association of Community Organizations for Reform Now (ACORN).

The Washington, D.C., consumer group issued a warning about coming mortgage “rate shock” after research showed resets are ahead for 24 percent of the nation’s home loan customers and 75 percent for subprime borrowers, who typically pay more up front because of poor finances or a bad credit score.

HOME MORTGAGES BY THE NUMBERS

Concerned current homeowners:

• 27 percent worry that rising interest rates will make it harder to make their mortgage payments.
• 23 percent are considering mortgage refinance action.

Renters worrying about the future:

• 61 percent worry that rising rates will make it hard to pay the landlord.
• 78 percent expect difficulty trying to purchase a home in the near future.

Fixed-rate Florida mortgage loans are held by:

• 33 percent of homeowners ages 18-24
• 69 percent of homeowners ages 25-49
• 37 percent of homeowners ages 50 and older