Cash-out refinancing rises in 2Q '05 -Freddie Mac

NEW YORK, Aug 2 (Reuters) - The number of U.S. consumers choosing to take cash out of their home equity rose in the second quarter of 2005 from the previous quarter as consumers sought to take advantage of lower-than-expected interest rates, Freddie Mac said on Tuesday.

In the second quarter, 74 percent of loans owned by Freddie Mac that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, up from 64 percent in the first quarter, the nation's No. 2 mortgage finance company said in its cash-out refinance report.

It is also the highest level of activity since the fourth quarter of 2000 when activity also stood at 74 percent, the company said.

"Interest rates on 30-year fixed-rate mortgages dipped lower in the second quarter, spurring refinancing activity higher," Frank Nothaft, Freddie Mac's vice president and chief economist, said in a press release accompanying the report.

"Mortgage borrowers took advantage of these low rates by cashing out some home equity before rates go up as they are expected to in coming quarters," he said.

Rates on 30-year fixed-rate mortgages should rise through the end of the year, ending with a fourth quarter average near 6.00 percent, approximately a quarter of a percentage point higher than the second quarter average, the company said.

Applications for refinancing, however, fell in the second quarter to 42 percent, down from the first quarter average of 45 percent, according to Amy Crews Cutts, Freddie Mac's deputy chief economist.

"The second-quarter cash-out refinance volume reflects, in part, borrowers responding to the fact that they may not be able to obtain such favorable rates in the future to fund home improvements or other big purchases," Cutts said in the release.

Based on Freddie Mac's July outlook for mortgage originations and refinancing activity over the next two years, the company estimates the amount of home equity cashed-out through prime, first-lien refinances to total $162 billion in 2005 and $69 billion in 2006.

Total equity cashed out in the second quarter is estimated at $59 billion, up from the revised cash-out estimate for the first quarter of 2005 of $43 billion

In the second quarter of 2005, the median ratio of old-to-new interest rate was 1.08, or one-half of the borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was at least eight percent higher than the new interest rate, the report said.

In the second quarter of 2005, homeowners who refinanced lowered their rate an average of 0.67 percentage points, Freddie Mac said.

The cash-out refinance report also showed that properties refinanced during the second quarter of 2005 experienced a median house-price appreciation of 23 percent during the time since the original loan was made, which is up from the 17 percent appreciation on the loans refinanced in the first quarter, the company noted.

Freddie Mac's estimates come from a sample of properties on which the company has funded at least two successive loans. Transactions are then screened to verify the last loan was for refinancing and not purchasing. The analysis does not track the use of funds made available from these refinances.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.