Americans in the second quarter tapped the smallest amount of home equity in a decade, showing households are focused on repairing tattered finances.
Owners took out $8.3 billion while refinancing prime home loans as borrowing costs dropped from April through June, down from $8.4 billion in the previous three months and the least in 10 years, according to a report today by McLean, Virginia-based Freddie Mac. Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.
Instead of extracting cash to binge on everything from cars to vacations as in previous recoveries, owners are refinancing to improve terms and reduce mortgage payments. The mending of household balance sheets means consumers will be in a better position to join the recovery once employment picks up.
“It’ll put consumers on firmer ground going forward,” said Michael Bratus, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “It’ll give consumers more confidence.”
A report yesterday from the Conference Board in New York showed confidence dropped in July to a five-month low on concern about jobs and wages. Americans may eventually become less pessimistic as they repair balance sheets and their financial situation improves.
So-called cash-out loans, in which borrowers increase their loan amounts by at least 5 percent, accounted for 27 percent of all refinanced loans in the three months to June, capping the lowest three-quarter share on record. Cash-out refinances peaked at 88 percent in mid 2006.
No ‘Cash-Out Boom’
“This is a rate-and-term refinance boom as opposed to a cash-out boom,” said Michael Larson, a housing analyst at Weiss Research in Jupiter, Florida. “Five years ago you had people liquidating equity to finance debt-fueled consumption. Now, refinancing gives them breathing room.”
Figures from the Mortgage Bankers Association signal the drive to take advantage of record-low mortgage rates has accelerated this month. The group’s refinancing gauge for the week ended July 16 reached the highest level in a year. Refinance applications accounted for 79.4 percent of all mortgage requests, the most since April 2009.
Ron Keating, a 50-year-old federal employee in Woodbridge, Virginia, said he lowered his monthly mortgage payment by about $150 after refinancing.
“The less I pay, the better,” he said in a telephone interview.
The average rate on a 30-year fixed mortgage fell to a 4.56 percent in the week ended July 22, the lowest since Freddie Mac, the second-biggest buyer of U.S. mortgages after Fannie Mae, began keeping records in 1971. At that rate, monthly payments for each $100,000 of a loan would be about $510, down about $40 from a year ago when the rate was 5.2 percent.
The median homeowner cut their mortgage rate by 0.9 percentage point in the second quarter, according to Freddie Mac. On a $200,000 loan, that would lead to a savings of $1,300 in the first year.
The money will contribute to a pickup in growth over the next two years, according to a forecast by economists at Moody’s Economy.com. They project consumer spending, which accounts for 70 percent of the economy, will grow 3 percent in 2011 and 4.5 percent the following year. Purchases are likely to climb 2.1 percent this year.