Cash-Out Refinancing Rises with Interest Rates

The number of home loan refinancing transactions declined in the first quarter of this year, but that didn't stop a lot of homeowners from continuing to tap into their equity.

Cash-out transactions, in which a homeowner refinances a loan with a new loan that exceeds the old loan amount by at least 5%, accounted for 64% of Freddie Mac loans that were refinanced in the first quarter, the secondary market agency said.

"The first quarter had record home sales and single-family housing starts and a lot of refinancing activity," said Frank Nothaft, Freddie Mac vice president and chief economist. "The share of borrowers who decided to cash out some home equity as part of their refinance increased, too, which helped prop up consumer spending on home improvements even though total home expenditures grew more slowly."

Freddie Mac expects the U.S. economy to grow at a slower rate in 2005 than the 3.9% growth experienced in 2004. Core inflation, which excludes food and energy costs, should continue to be low, but high energy prices are starting to filter into the prices of goods and services and have already depressed consumer spending, according to Freddie Mac.

"The disappointing economic news over the past few weeks is not likely to cause the Fed to deviate from its measured pace of quarter-point increases in the federal funds rate," Mr. Nothaft said.

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