By Kenneth R. Harney

February 7, 2010
Reporting from Washington
Thinking of cashing out some equity when you refinance your mortgage? Sure, that used to be what millions of homeowners did when they needed extra money.

But now get ready for the post-boom, post-crash trend: "cash-in" refis -- the opposite of cash-outs.

"It almost sounds un-American," quipped Frank Nothaft, chief economist for mortgage giant Freddie Mac. After all, Americans have grown accustomed over much of the last two decades to tapping into their equity -- pulling out a chunk of cash and adding to their debt load -- when they refinanced their mortgages. "Almost nobody thought of putting money back in."

Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid-2006, just before home values began deflating across the country, the rate of cash-outs hit 88%, according to Freddie Mac, which monitors refinancings quarterly.

This meant that nearly 9 out of 10 refinancers whose loan files were sampled by Freddie Mac increased the size of their mortgage balance by at least 5% in the process. It was the heyday of the pile-on-more-debt mind-set -- cash me out, I can't lose on my real estate -- that came crumbling down in 2007 and 2008, when home equity holdings shrank drastically and painfully.

From 2005 to the third quarter of 2009, according to Federal Reserve estimates, American homeowners lost $7 trillion in equity -- an unprecedented evaporation of household wealth. Almost nobody was spared.

Now the pendulum in consumer psychology appears to be swinging toward reduction of household debt -- whether on credit cards or mortgages.

In Freddie Mac's latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, the highest percentage ever. By contrast, only 27% of refinancers took cash out -- the lowest percentage on record.

Why shift money from savings into your house? Nothaft says a small percentage of refinancers -- including himself and his wife -- traditionally have preferred to lower their mortgage balances whenever possible.

There are at least two key rationales for doing so, Nothaft says. No. 1: If interest rates are low and you're getting minuscule returns on your bank savings or money market funds, paying down your home loan may well provide you a better return on your investment.

For example, in early 2009, Nothaft and his wife chose to lower their mortgage balance at the same time they were refinancing. "We thought, hey, this is a no-brainer," Nothaft recalls. "We can get a 4 3/4 % return instead of close to zero" on checking accounts and bank deposits.

A second reason to consider a cash-in refi would be to qualify for a better interest rate and terms on the replacement mortgage.

Say you have a loan-to-value ratio above 80% and any refi of the current balance will require payment of private mortgage insurance premiums and possibly come with a higher rate.

But if you have some money that you could devote to lowering the principal balance -- cashing in -- you might be able to cut your LTV to 75% or less and get a more favorable interest rate and avoid mortgage insurance premiums.

Cash-ins, in effect, are a disciplined form of saving -- one that in today's depressed rates for competing types of savings might be an astute financial move.



Nothaft isn't sure whether the recent jump in cash-in refis is the start of a long-term societal shift. But there has been a steady rise since the fourth quarter of 2007, when cash-ins hit 9%, up from just 5% of all refis earlier that year.

By early 2009, they accounted for 13% of refinancings, then grew to 18% in the third quarter. After that, cash-ins jumped to 33% in the final three months of 2009.

"It may well be a reaction to higher credit standards by lenders" -- making cash-outs and refis in general tougher to get -- or "some decision on the part of many people to be a little more conservative in uncertain times," Nothaft said.

A cash-in refi is hardly an option for everyone. But with mortgage rates widely predicted to rise from 5% at present for a 30-year fixed-rate loan to the mid- to upper-5s as the year progresses, the numbers just might work for you if you have the resources.

kenharney@earthlink.net

Distributed by the Washington Post Writers Group.