More Refinancers Tapping into Home Equity

As home equity grows, more Americans are tapping into that equity more often when refinancing their homes, according to the latest quarterly refinance analysis report from Freddie Mac.

In fact, the share of borrowers tapping their equity by cashing out at the time of refinancing has doubled from the same quarter last year as house price appreciation has risen across the country.

According to Freddie, home equity grew by $3 trillion between the second quarters of 2012 and 2014. Freddie attributed much of this upswing to home value gains combined with shorter-term loans and faster-than amortized principal paydowns.

In other words, while the share of borrowers that cashed out some equity has increased considerably over the past year, the refinance volume has fallen sharply, according to Frank Nothaft, Freddie's VP and chief economist.

This, Nothaft said, has resulted in "a relatively small amount of equity cashed out, to the tune of roughly $8 billion." This, he said, is "less than one-tenth of what we saw at the peak in mid-2006."

Freddie estimates that homeowners who cut their payments by refinancing to a lower mortgage rate will save more than $1.5 billion in interest payments over the next year. On average, that's an interest rate reduction of about 24 percent, or $2,700, on a $200,000 loan, Nothaft said.

The news is even better for homeowners who took advantage of HARP financing. They have seen an average interest rate reduction of 1.7 percent, which means that on a $200,000 loan, HARP-enrolled homeowners will save an average of $3,400 in mortgage interest over the next year. That's about $280 per month.

Further, 36 percent of homeowners refinanced into a shorter-term fully amortizing loan in order to pay down principal and build home equity faster than on their previous loan, the report stated. Freddie averred that this is a sign that homeowners are building wealth as the equity in their homes increases.

Before the Great Recession, this segment represented between 2 and 10 percent of all borrowers by year, Freddie reported. Since the recession, however, 15 to 20 percent have paid down additional principal prior to refinancing.

"This could reflect the decision of some borrowers to pay down their principal further to avoid paying mortgage insurance," Nothaft said.