Higher mortgage interest rates are causing fewer home owners to refinance, but most of those who do refinance cash in on their equity with larger, more expensive 30-year loans.

In the first quarter of 2000, 79 percent of Freddie Mac-owned loans were refinanced with loans that were at least 5 percent larger than their original mortgage, compared to 57 percent during the first quarter of 1999.

Refinances comprised only 20 percent of the mortgage market during the first quarter, compared to 50 percent a year ago, but those who do refinance are also paying a median fixed rate that's 0.3 percent more expensive than their original loan, according to Freddie Mac.

"When interest rates come up and there's a healthy housing market, for a lot of people who are house rich and cash poor, it makes sense to them even though their rate is going to be 0.3 percent higher. It's not that much different," said Vassilis Lekkas, a Freddie Mac economist.

While more expensive refinanced first mortgages are common when rates rise and home owners have lots of equity, some experts say there might be a more economical way to borrow against your home.

Many refinanced mortgages come with additional points and closing costs and, while most home equity loans have higher interest rates, they typically don't sock you with as many extra fees.

"Maybe the logic is that property values are going up and that is going to cover the extra expense, but seconds (home equity loans) are so cheap and flexible," said Earl Peattie, president of Mortgage News Co. in Morro Bay, CA.

Freddie Mac's survey said the median age of the refinanced mortgages was 6.6 years and unless you shorten the term, refinancing to the larger, more expensive loan also comes with a new 30 year term. Equity loans are available for 10 or 15 years.

"If somebody wants to be stupid, there's no law against it. A lot of people are really taken in by getting something in the mail that says you can refinance and you can take cash out and everything is taken care of for you. If you are so busy you don't take time to learn about the other options, it could come back to bite you later," Peattie said.

A greater number of home owners are enjoying the benefits of a booming economy in the form of increased home values. Homes with refinanced mortgages experienced a 27 percent rate of appreciation, compared to 11 percent a year ago, according to Freddie Mac.

Jack Guttentag, publisher of The Mortgage Professor Web site, says even if you refinance your first, it's often cheaper to refinance only 80 percent of the property value and borrow any additional funds as a home equity loan.

"It's not a slam dunk, you have to look at the rate of the refinance with a cash-out and a rate on the home equity loan along with your existing rate. If the cash-out refinance involves a high loan-to-value, you may have to pay mortgage insurance you wouldn't have to pay on a second," Guttentag said.

See PART II, "The Pros and Cons of Tapping Your Equity"

Published: June 8, 2000

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.