To Refi Your Mortgage, Write a Check

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About a third of all the people who refinanced their home loans in the last months of 2009 lowered their principal balance, typically by writing a check to their bank for tens of thousands of dollars.

It used to be that many people refinanced to squeeze money out of their homes. Higher home values, lower interest rates, or both allowed borrowers to increase the size of their original home loans and get their hands on thousands of dollars in cash.

Now, people seem more interested in lowering their debt than treating their house like an ATM. No wonder refinancings are down.In the fourth quarter of 2009, 33 percent of borrowers who refinanced their prime, conventional home loans lowered their principal, according to Freddie Mac's quarterly Refinance Report. This is the biggest "cash-in" rate since Freddie Mac began tracking the characteristics of refinance transactions in 1985.

Why would homeowners write a check to refinance? Most homes have lost value in the real estate crash. Roughly a quarter of all mortgages are larger than the sale value of the underlying homes, according to American First Core Logic. This has made it difficult for many homeowners to refinance and take advantage of low interest rates that averaged just 4.9 percent in the fourth quarter, according to Freddie Mac's Primary Mortgage Market Survey. To get the best interest rate, a new loan needs to be for less than 75 percent to 80 percent of the home's current value.

"The main causes of the decline in cash-out refinancings are declining home prices in many areas of the country that have eliminated equity that could have been extracted and tighter underwriting standards for loan-to-value ratios," said Amy Crews Cutts, Freddie Mac deputy chief economist.

The median loan refinanced in the fourth quarter was for a home that had lost 2 percent of its value, according to Freddie Mac. That means that half of the homes refinanced in the fourth quarter had lost more value than that, perhaps significantly more.

Some people are still squeezing money out of their houses, but far fewer than in the real estate boom. Roughly a quarter, or 27 percent, of the homeowners who refinanced in the fourth quarter significantly increased their loan size. That's down from 88 percent, or nearly everybody, at the peak of the boom in the third quarter of 2006.
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