Getting off the horse before she bucks you…

    If you follow along on my Facebook page, you would have seen the link to this article there, but I thought it merited some discussion here on Musings. Dan Green, who authors The Mortgage Reports, wrote about how many homeowners are now choosing to refinance from an Adjustable Rate Mortgage (ARM) to a fixed rate, despite ARM rates being at record lows. Here’s an excerpt from his post (click through and read the whole thing):

    Compliments of The Mortgage Reports

    According to a Freddie Mac report of its own mortgage holdings, refinancing homeowners flocked to fixed rate products last quarter.

    Between June-September 2010, Refi Boom participants “went fixed” 19 times out of 20.

    That’s an astounding percentage. For several reasons, really.

    The first is that the interest rate spread between the 5-year ARM and the 30-year fixed was historically large last quarter, registering 0.81% on average. By comparison, during the 12 months prior, the spread was just 0.66%.

    Relative to recent history, therefore, homeowners had a large incentive to take the ARM last quarter, but chose not to.

    The second reason is tied to how adjustable rate mortgages work. Because most conforming ARMs adjust on the 1-year LIBOR and LIBOR was near its all-time low last quarter, ARM-holding homeowners watched their respective mortgages adjust to 2-something percent, but still wanted out.

    Instead, they got fixed rate loans in the 4s.

    And lastly, it’s not like the rationale for choosing an ARM over a fixed has changed that much. If a homeowner took an ARM however-many years ago, the rationale for taking one today would likely be the same (i.e. moving in the next few years; want the lowest possible payment). 85% of homeowners with ARMs swapped out for a fixed.

    Homeowners opted for certainty over savings.

    Fear beat frugality.


    The other interesting thing from the third quarter numbers is that 33% of homeowners who refinanced brought money to the table to do a “cash-in” refinance, and effectively bought more equity in their homes. That’s the second highest “cash-in” quarter since Freddie Mac began keeping records in 1985. This doesn’t surprise me in some respects, because otherwise these folks would not be able to refinance (because their prior loan amounts were greater than 80 percent loan to value ratio). However, in our market area especially, bringing 20 percent to the table on a $500,000 home is $100,000! During a time when unemployment across the country is rising, would you take that much of a cash cushion and put it back into your home? Is it worth the decrease in mortgage payment from the lower interest rate?

    To a degree, though, this shows confidence in the real estate market. People who are effectively putting money into their homes are saying they think the market isn’t going to drop further, eliminating part of that equity they just created. Either that, or the real estate owning mentality has changed, and people are looking at homeownership for the long haul, and not a quick buck.

    Have you refinanced in the last year, and did you cash in? What were your reasons for doing so?



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    Michael and Heather Elias are full time real estate professionals and licensed REALTORS at Century 21 Redwood Realty. They sincerely hope you enjoy reading this blog, and would love the opportunity to work with you.

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