Low bank rates make mortgage rates look good: cash-in refinancing grows

A few years ago consumers were using their homes as ATM machines with cash-out refinances.

Today's growing trend is just the opposite: cash-in refinances. Freddie Mac reports that 22 percent, or more than one in five, homeowners who refinanced their first-lien mortgages in the second quarter lowered their principal (and their interest payments) by bringing additional cash to the closing table. The percentage tied the record for the third highest cash-in share since Freddie Mac began tracking refinance patterns 25 years ago.

Refinance rates are at 50-year lows, with average 30-year fixed mortgage rates at 4.54 percent at the end of July, down from 5.25 percent a year ago, according to Freddie Mac's weekly survey. But as Freddie Mac vice president and chief economist Frank Nothaft said in a press statement announcing the figures, "[Rates] on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves."

Even best CD rates are low

Rates on savings accounts, money market accounts and CDs have been at paltry levels since the economy withered, and with the Federal Reserve vowing to maintain current monetary policy for an extended period, they won't be jumping up for a while.

Homeowners who took cash out, increasing their loan balance by at least 5 percent, made up only 27 percent of those who refinanced mortgages in the second quarter of 2010--the lowest share of cash-out refinances in the 25 years Freddie Mac has tracked them.

Cash-out refinancing has declined in part because of falling home prices and tightened underwriting standards, with lenders demanding stricter loan-to-value ratios. Freddie Mac says the median appreciation of refinanced homes was a negative 5 percent over a median prior loan life of 4.0 years.