Saturday, December 04, 2004

Borrowers flocking to cash in on equity 'cashouts'

Washington Post Writers Group

Americans might be filling the malls for holiday shopping, but when it comes to serious financing needs they are lining up in record numbers to tap their real estate equity.

New research by mortgage market giant Freddie Mac found that 60 percent of all refinanced mortgages the corporation bought during the third quarter of 2004 involved "cashouts," in which homeowners increased the size of their loans and pocketed the difference tax-free. That 60 percent figure was up from 42 percent during the second quarter and represents the highest rate since mid-2002.

In hard-dollar terms, U.S. home-owners converted $41 billion in real estate equity into spendable cash in the third quarter, up from $28.5 billion during the second quarter. For the year, Freddie Mac estimates that homeowners will cash out $118 billion.

A typical cashout works like this: Say you have a mortgage balance of $200,000. But the market value of your house has appreciated in the past few years to $400,000. If you need cash, you could refinance your $200,000 loan and replace it with a $250,000 or $300,000 mortgage. The proceeds -- $50,000 to $100,000, less the transaction costs -- would be yours to keep, tax-free.

The key to this trend, of course, is an unusual confluence of high home value appreciation with near-record low borrowing costs. The average U.S. house has gained 44 percent in value in the past 60 months, according to the Office of Federal Housing Enterprise Oversight. In some high-roller markets on the West and East coasts, appreciation gains of 60 to 80 percent or more during that period have been common. Meanwhile, 30-year mortgage rates have hovered at or below 6 percent, making borrowing money from your home piggy bank cheaper than it has been in four decades.

In Freddie Mac's study, the houses securing cashout refinancings had experienced a median appreciation of 17 percent in value during the brief, 2.6-year median life of the preceding mortgage.

Even with the high cashout ratio, however, many refinancers lowered the interest rate on their notes. More than half of all refinancings in the study produced net decreases in the interest rate from the preceding mortgage to the new loan.

Another booming technique for tapping rapidly accumulating home real estate wealth: equity lines of credit. In a recent survey of a sample of its members, the Mortgage Bankers Association of America recorded a surge in new applications for home equity lines of credit -- up an astounding 77 percent in the first half of 2004.

Not only were new applications rising, but the size of the credit lines appears to be ballooning as well. The average credit line was $71,932 in January and swelled to an $83,630 average for new lines in July, a 16 percent jump. The initial average draw-down on the lines also was up -- from $42,523 in January to nearly $46,000 in July.

Home equity credit lines are hot because lenders have cut rates, cut settlement fees and streamlined the closing process dramatically. Equity lenders, primarily big banks, routinely offer credit lines priced at or below their prime commercial rates for eligible homeowners with high credit scores. After taxes, the effective cost of these lines is in the mid- to upper 3 percent range for many consumers.

As just one example of the trend, Bank of America's popular "equity maximizer" program offers lines up to $500,000 for eligible homeowners and guarantees no appraisal fees, no title charges, no origination or underwriting fees, no local transfer or recording taxes, no annual maintenance fees and no early termination penalties.

With most of the traditional application and settlement fee hassles removed, should equity-flush owners join the crowds and hock their homes to the hilt? Hardly. Remember: Equity lines and cashout refinancings add to your outstanding household debt and can raise your total monthly debt payments significantly. Equity lines typically have floating rates that can be adjusted monthly or quarterly, putting you in a potential payment squeeze if short-term rates spike.

More sobering: Because both types of mortgages are secured by your house, they open you to the possible loss of your residence and your equity in the event of a foreclosure, unlike other consumer loans.

But you shouldn't ignore financial reality: If you truly must borrow money for a major project, take a hard look at the equity sitting frozen in your home. After tax deductions, it might well be your cheapest and quickest source of cash.

1 Comments:

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