Mortgage Refinance Market Still Booming

As 2006 slowly draws to a close, Americans are getting one more collective cash advance from their homes.

They’re doing it with cash-out refinancing. In the Sunshine State, that means Florida mortgage loans big enough not just to cover debt but to deliver some immediate cash to the borrower.

In the spring, cash-out refinance activity expanded to its highest percentage of market-share in 16 years — 88 percent of mortgages refinanced through Freddie Mac, the U.S. mortgage market’s second-largest financier.

Homeowners drained $81 billion in home equity this way during this year’s second quarter, Freddie Mac said. The price of that quick cash: at least 5 percent more Florida mortgage debt and loss of a loan that was a median 7 percent lower, data shows. Why refinance when interest rates are higher?

“Either they’re serious about getting cash out for a home improvement or business, or they’re seeing that reset (of an adjustable-rate loan) down the pike and want to change into something that will be cheaper,” Amy Crews Cutts, Freddie Mac’s deputy chief economist, said in an interview.

Adjustable-rate mortgages offer low introductory monthly payments, then creep up as they reset higher when the teaser-rate term expires, leading to heightened risk of foreclosure.

Such Florida home mortgages have been popular in recent years because they allow people to buy earlier — or more – than they otherwise could afford.

“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 and they’ve got a job, they might say, ‘Let’s refinance today,’” Cutts said.

To what extent that’s happening, and will continue, no one knows.

“The hard thing, of course, 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,” Cutts said. “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 research suggests that more consumers are getting nervous about exotic loans. A poll commissioned by TrueCredit.com in May found that 27 percent of just over 1,000 respondents worried about meeting their mortgage payments.

“We knew rising rates were starting to squeeze people, but it’s a little shocking that it’s so high.” said Luci Duni, consumer education director for the San Luis Obispo, Calif., organization.

Her advice to the worried: curb spending, improve your credit standing and consider the costs and benefits of Florida home mortgage refinancing.

“Estimate how long it takes to break even, based on refinance costs. If you plan to stay in your home longer than that, then it’s a good thing,” Duni said.

Consider both the closing costs on a new home loan and the fact that the clock starts all over again on a new 30-year loan. If you refinance to a 15-year loan, your payments might be higher at the onset, but you will pay off your house twice as quickly.

Some people already have ample equity. U.S. house values rose 57 percent in the five years that ended March 30, according to the Office of Federal Housing Enterprise Oversight (OFHEO).

That advance, tied to the incredible price appreciation seen during the nation’s housing boom (R.I.P, 2001-2005), changed public attitudes about the meaning of home.

“All these people not only have a reset, but lots of equity. They say, ‘I need a new deck, or a kitchen remodel. I might as well pull some cash out and do it now.’ Their wages are stagnant, but they have all this wealth from their home,” said Stephen LaDue, President and CEO of Affiliated Mortgage & Financial Corp.

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

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

“A lot of people we’ve seen didn’t even know that they had an adjustable rate,” Coffin said.

And more and more of those people are finding out the hard way, said Alex Hoffmann, president of America’s Home Loan in Brookfield, Wis.

He cited several customers who were stunned to learn that the reset on their 7 percent subprime home loans were about to shoot up to 12 percent.

“Our loan officer refinanced them down to about 7 percent — but it was only possible because he’d cleaned up their credit record,” Hoffmann said.

FLORIDA MORTGAGE LOANS BY THE NUMBERS

Among homeowners:

• 27 percent worry that rising home loan rates will make it harder to make their monthly payments.
• 23 percent are considering a mortgage refinance.

Among renters:

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

Fixed-rate mortgages are held by:

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