Mortgage borrowers in the United States have been enjoying some of the lowest interest rates since World War II, and they have been taking advantage of this historical moment by refinancing in droves. According to government-sponsored mortgage guarantor Freddie Mac, borrowers who refinanced in late 2012 took advantage of an average 33 percent reduction in their interest payments. This means that many homeowners in the United States are realizing savings in the thousands each year, which begs to ask: How are these savings being put to use?
Cashing Out With Restraint
According to a recent CNBC report, the value of residential properties in the U.S. is appreciating at a solid pace but mortgage borrowers are being cautious about converting that newfound equity into borrowed cash. Freddie Mac estimates that cash out refinance operations in late 2012 were valued at $8 billion, a far cry from the $84 billion cashed out by eager borrowers in the second quarter of 2006.
Although equity is coming back to U.S. real estate, many borrowers are not yet in ideal cash-out situations. Recent statistics released by Freddie Mac indicate that the pace of cash out refinances is steady, but there is not a tangible rush to spend that equity. The pace of home equity lines of credit (HELOCs) is also on the rise, but the expenditures thus far are mostly geared towards home improvement, cash savings and educational expenses. Only about seven percent of middle-class households that are in a position to cash-out do so, while 19 percent of luxury homeowners have chosen to do so.
Changing Rate and Term
The popular 30-year fixed rate mortgage is not so popular anymore. By Freddie Mac's estimates, nearly a third of all refinances in the final quarter of 2012 consisted of changing the loan term down to 15 years. This move to the 15-year fixed rate mortgage is not surprising since the new lower rates leave monthly payments nearly intact for some borrowers.
The borrowers opting to refinance into an adjustable rate mortgage (ARM) from a fixed-rate product these days are clearly saving up on their annual percentage rate (APR) and monthly payments, but these borrowers are waiting for the pace of home value appreciation to move even faster. These are the borrowers who are hoping to profit from a more dynamic housing recovery in 2013, while the 15-year fixed rate mortgage borrowers are locked into their homes on a long-term basis.
At the current pace of median home price appreciation, many American borrowers will become eligible for refinancing in 2013, but it remains to be seen whether they will hold on to the savings they realize or end up quickly injecting them back into the consumer economy.