There is a lot of talk regarding the large number of all-cash real estate purchases. What about refinancing? Are homeowners reducing the size of their loans?
Homeowners are reducing their real estate debt, despite the rise in home values seen in most markets.
The Federal Reserve reports that residential mortgage debt amounted to $9.372 trillion at the end of 2013 – a reduction of more than $1 trillion since 2009.
Given the decline in unemployment, the increase in home values and the availability of low-interest financing, it may seem strange that mortgage totals are down, but actually there is some sense to it.
First, we see more and more homes bought for cash. Some of this is investor money but not all. The National Association of Realtors reports for February 2014 that 35 percent of all existing-home purchases were all-cash sales while 21 percent were made by investors. This also means about 14 percent of all February residential buyers paid cash for their homes.
Second, traditional savings options are generating small returns. For instance, a five-year CD is paying about 1.5 percent at this writing, while that same money used to buy a home is replacing mortgage debt that might cost 4.4 percent. For some buyers it’s attractive to put down more when they look at the alternatives.
Third, more money down can mean avoiding mortgage insurance, a big cost.
Fourth, some borrowers are refinancing to a lower rate, and instead of a cash-out loan where they leave closing with a check they are instead reducing their debt and borrowing less by bringing cash to settlement. This sometimes is called a “cash-in” refinance.
Fifth, many people like the comfort of less debt and, even better, no debt. People who own their homes outright cannot be foreclosed, a calming thought during the mortgage meltdown.
In considering cash and mortgage debt borrowers need to look carefully at their available cash, their ongoing needs and future costs. Money invested in a home may be less liquid than alternative options, a potential problem if there’s a sudden need for cash. To review mortgage options speak with mortgage lenders, and for budgeting speak with a fee-only financial planner.
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