According to a report released this week by Freddie Mac, in the fourth quarter of 2006, 84 percent of new mortgages that were the result of refinancing were “cash out" loans. A cash out has been defined as a loan where the new mortgage is at least 5% more than the value of the mortgage it replaces. This makes a refinancing with this strategy a great source of money-A CASH COW
This represents an amazing $70.7 billion in cash out refinance loans for the quarter down from the third quarter at $80.2 billion. Refinancing grew to 46 % of all mortgage applications for the period.
The reasons actually are quite simple. Interest rates are at the same level as they were 12 months ago and a 14 month low. The primary mover of refinance continues to be equity extraction. Huge amounts of ARM's are coming due to be readjusted and the rate may be higher than the current ARM-not for long. This results in lower payments in the near term.
The $70.7 billion in cash outs money helps fuel the economy. Major home improvements, college tuition, debt consolidation all are reasons home owners take out home equity loans.
A re-finance cash out makes great sense if the homeowner can get a loan that will lower their monthly payments, especially if the current arm is scheduled to readjust soon. Throw in some extra cash and you have yourself a great deal.
It is no wonder lenders love these loans so much. Mortgagors are willing to pay higher rates now four quarters in a row for the same collateral-your home. In a way it is a classic win-win.
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