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Refinancers cut interest rates and shrink their debt

How are homeowners responding to record-low interest rates? A lot of them are refinancing into low-rate mortgages and shrinking their mortgage balances at the same time, according to a report released Thursday by Freddie Mac.

The mortgage-finance giant said that one-third of borrowers who refinanced their mortgages in the fourth quarter brought cash to the table, taking out new mortgages with smaller balances than the loans they were paying off. It was during the fourth quarter that 30-year fixed rates hit a record low of 4.71 percent.

In the fourth quarter, 33 percent of refinancers lowered their mortgage balances, while only 27 percent took out a new loan that was at least 5 percent larger than the old one. Half of the refinancers lowered their interest rates by at least 0.9 percentage point, and all together, they can expect to save about $2 billion over the first 12 months of their new loans, according to Freddie Mac.

The median appreciation rate for the refinanced homes, however, was a negative 2 percent. I asked Freddie Mac chief economist Frank Nothaft if many of these refinancers brought cash to the table because that was the only way they could secure a lower-rate, given the decline in home values. "That's certainly possible," he said. "but I don't think that's the majority of it."

He said some homeowners, especially investors, may have paid down their loan balances to get their equity to at least 20 percent, so they could snag the very lowest interest rates available.

Another likely reason, he said, could be that borrowers decided the mortgages offered a better return than their bank deposits. "When we refinanced we paid down some," Nothaft said. "I took a look at my federally insured savings account, which was earning only one-half of a percentage point in interest ...and I figured I might as well take that money and pay down my mortgage" which was costing about 5 percent.

Almost all refinancing recently has been into fixed-rate loans, Nothaft said. And, with 30-year rates still below 5 percent, he said he expects refinancing volume to stay high through the early part of this year.

By Elizabeth Razzi  |  January 28, 2010; 3:50 PM ET
Categories:  Mortgages , Statistics , The economy  
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