Lessons learned

What have recent signs in the housing market shown us? What lessons should we be taking away from this? I have a few thoughts.


There is a positive trend in mortgages. More homeowners are refinancing into shorter-term or 15-year loans. Meanwhile, fewer homeowners are extracting equity or cash from their homes. These developments, combined with increasing home prices, are increasing home equity. According to a recent Freddie Mac refinance quarterly report, home equity increased by $3 trillion in the past two years as of the first half of this year.

Approximately 36% of homeowners obtained shorter-term mortgages. This mortgage product has been attractive because of financial incentives. The difference, or spread, between a 15-year and 30-year fixed mortgage interest rate has been significant. This spread has been almost a full percentage point for three-quarters of this year. So in effect, a homeowner could manage a larger monthly payment on a 15-year mortgage because the interest rate is a percentage point lower.

Another reason why there is interest in shorter-term loans is because of the federal government’s Home Affordable Refinance Program (HARP) incentive to do so. HARP will waive some of the fees to refinance if a shorter-term loan is obtained by homeowners who are underwater on their mortgage. The waiver of these refinance fees was introduced in late 2011.

Reportedly, only 28% of homeowners who refinanced during the third quarter of this year extracted cash. While this was higher than in the first half of this year, the amount taken (approximately $8 billion) was relatively low. The chief economist for Freddie Mac, Frank Nothaft, notes that cash-out financing since 2010 has been at levels similar to the 1990s.

In comparison, cash-out refinancings spiked (about $84 billion) during the real estate peak in 2006. Understandably, lessons were learned from the economic downturn about debt risks.

Cash-out financing is typically more costly — 25 basis points to as much as 3%. The cost depends on a borrower’s credit score and loan-to-value ratio.

Another shift is in the purpose of cash-out in refinancing. Homeowners are using the funds to buy down the principal of their mortgage, reduce debt and for other balance sheet improvements rather than for consumption.

As interest rates have remained low in the past four years, many homeowners wishing to keep those rates are seeking home equity lines of credit to improve their homes.

Winter home protection

As the temperatures tumble, homeowners can minimize winter’s threats by:

• Removing snow from basement stairwells, window wells and walls to prevent water damage and seepage.

• Ventilating attics well so that their temperatures are similar to outside so as to minimize the formation of ice dams.

• Clearing all gutters of leaves and debris to also reduce the risk of ice dams.

• To keep pipes from freezing, fitting exposed pipes with insulation to slow heat transfer.

• Sealing cracks and holes in outside walls and foundations.

• Allowing a slow trickle of water to flow through faucets connected to pipes that run through an unheated or unprotected space, and keeping cabinet doors open to allow warm air to circulate around pipes.

These tips can help you in the long run and allow you peace of mind as you sit down with the family for a turkey dinner. Wishing you a warm and happy Thanksgiving.

Mary Ann Clark is a Realtor with Coldwell Banker at 189-191 Mason Street in Greenwich. Questions or comments may be emailed to [email protected]

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