Released: August 13, 2006

Trend: Homeowners paying higher rates to cash out

Source: By Kenneth R. Harney, Syndicated Columnist [Detroit Free Press]

Remember when you refinanced your home mortgage to get a lower interest rate and pay less every month? How quaint. And how utterly out of date. Now the rage is refinancing into a higher interest rate - yes, you read that correctly - while pulling out buckets of fresh cash.

Almost nine out of 10 homeowners who refinanced during the second quarter of this year cashed out additional money - often tens of thousands of dollars or more - according to mortgage investment giant Freddie Mac. The 88% cash-out refi rate was close to the all-time record, and the rate could surpass the record later this year.

Meanwhile, the typical refinancer hasn’t been scouring the market for an interest rate lower than his or her existing first mortgage. To the contrary, according to Freddie Mac, most refinancers are opting for larger replacement first mortgages with rates averaging about one-half percentage point higher than on their old loan.

Cash-outs may be booming, but they are not a new phenomenon. They’ve existed for years as a financial tool to extract equity tied up in real estate and to convert it to immediately spendable money. During the refi boom years of 2003 and 2004, for example, anywhere from a third to a half of all refinancers pulled out some additional cash. However, the overwhelming majority of borrowers during the go-go refi years chose traditional rate-reduction replacement mortgages in which the new balance approximated the old balance, and the new monthly payment was lower than the old.

Scroll ahead to mid-2006: Short-term interest rates no longer hover near 4%. Thirty-year fixed-rate first mortgages no longer are in the 5’s. Now the prime rate is 8 1/4 % and could move higher. 

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