It’s not news that the U.S. housing market has crashed and burned, leaving millions of home owners underwater and in foreclosure. However, according to a recent article in the Wall Street Journal, for some borrowers, record-low mortgage rates and dropping values have incited a new trend – reinvestment in the old mortgage.
From intentionally taking a loss in order to refinance (and basically repurchase the home) to paying cash of pocket to close out the old loan in order to get low interest, short term mortgages on the original property, some home owners are sinking even more money into what has been labeled a losing market.
Is this a savvy play or a losing proposition?
Some economists believe it can be the right end-around, especially because low mortgage rates are making monthly payments very manageable. The added twist is that the record-low rates are making short-term mortgages, even 15 or 10 year mortgages, very reasonable, giving the owner a quicker equity position. Additionally, the volatile stock market has made investors look elsewhere to park cash; and bargains abound in the depressed market, changing the traditional rule of thought against sinking cash into real estate holdings.
Freddie Mac reported that cash-in refinances made up a third of all refinancing in the 4th quarter of 2009 - a record for all such transactions that Freddie has been tracking since 1985.
"Historically high percentages of borrowers are paying down their principal when they refinance their mortgages," says Brad German, a Freddie Mac spokesman.
Even though strategic defaults have become more and more common, along with short sales, most homeowners remain reluctant to walk away from their home or take a huge loss because of declining values. Finding a way to refinance with a cash reinvestment can be a way to salvage their original interest in the home until the market turns around.
Refinance packages used to be a means of getting cash out of a home. Today’s distressed market and low rates have created a significant paradigm shift in the way borrowers are looking at their mortgages.