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Rate and Term Refis Reduce Mortgage Payments by Billions


Cash out refinancing hit its lowest point since late 2003 last quarter, but that’s not necessarily bad news.

During the second quarter, just 38 percent of refinances resulted in loan sizes five percent or higher than the previous balance, while 16 percent resulted in a lower loan amount, according to Freddie Mac.

That compares to 43 percent and 13 percent, respectively, a quarter earlier, meaning more borrowers are obtaining lower mortgage rates without sucking out home equity (that’s a good thing).

“A big part of the benefit of refinancing is the lower monthly payment that borrowers enjoy – the payment savings from ‘rate-and-term’ refinancing done during the quarter is about $160 a month on a $200,000 loan,” said Freddie Mac chief economist Frank Nothaft, in a statement.

“But these borrowers also accumulate principal faster than they would have with a higher-rate loan even after taking into account the longer terms of the new loans. In aggregate, second-quarter refinancers will have about $200 million additional principal paydown after a year than they would have under their old loans.”

In total, refinances carried out during the second quarter will reduce mortgage payments by $3.4 billion over the coming year, providing relief for many on the brink.

Half of the borrowers who refinanced their loan over the past three months lowered their mortgage rate by at least 20 percent, with the new rate about 1.25 percentage points below the old rate.

The lack of cash out refinancing was attributed to both stricter guidelines for such lending and a lack of available equity to draw from.

Rates are still historically low, but not at the record low levels seen back in April.

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