What homeowners are doing with their refi savings

By Paul O'Donnell | CNBC.com

Refinancing homeowners dropped their interest rate an average 1.8 points last quarter, according to numbers released recently by Freddie Mac, as borrowers took advantage of November's record-low interest rates on mortgage loans. That 33 percent savings is the largest since Freddie Mac began keeping records 27 years ago.

At the same time, refinancers took relatively little cash out of their refinance. Nationally, Americans cashed out just $8.1 billion in the fourth quarter, down from the high of $84 billion in spring 2006, at the height of the real-estate boom.

That means most who refinanced dropped their monthly payment along with their interest rate. "On a $200,000 loan, that translates into saving about $3,600 in interest during the next 12 months," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

Not everyone is choosing to lower their payment, however. Many borrowers are taking their gains in time, shortening the term of their new mortgages to 15 years and keeping their monthly payment steady, or even paying a little more. Last quarter, nearly 30 percent of refinancers switched from 30-year to 15-year mortgages.

The charge into 15-year mortgages comes as many baby boomers look to pay off their homes in time for their retirement. "If you're a boomer and looking to own your home free and clear around the time you want to retire, these record-low interest rates are providing a great opportunity," said Chad Wandler, a Freddie Mac spokesperson.

That trend, and the low numbers of those taking cash out of a refinance, seems to indicate that Americans are using low interest rates and the recent rise in home values to consolidate their chief investment's gains, rather than spend them.

"Most people don't have equity to take out," Greg McBride, senior economic analyst for Bankrate.com, pointed out. After years of recession and shaky economic recovery, "Americans are in the mode of deleveraging."

McBride said: "For a lot of people, the prudent move may be to make lower payments and use the extra money to max out their IRA contribution, or pay down higher-cost debt."

But Freddie Mac's statistics suggest that homeowners are taking equity out of their homes when they can. The cash-out numbers may be deflated by the fact that many refinances were completed under the federally sponsored HARP program, which gives banks incentives to refinance mortgages with minimal fees, but doesn't allow the homeowner to take out cash.

And where home prices stayed more buoyant through the recession and have snapped back faster, the cash-out figures are higher. Around Detroit, where the housing market suffered steep declines in recent years, borrowers took out equity in only 7 percent of mortgage refinances last quarter, while in the more prosperous Boston market, they cashed out 19 percent of the time.

The recent rise in home-equity loans, too, is evidence that what homeowners are saving on their monthly payments may be going back into house-related debt. While much of this money may be going into improvements, it's a sign that the bubble has changed little about how we bank on the places we live in.

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