American consumers are now using their homes as piggybanks -- literally. A new report from mortgage giant Freddie Mac reveals that nearly nine out of every ten homeowners who refinanced during the first three months of this year "cashed out" -- that is, they pulled out extra money rather than seeking a lower interest rate.

The 88 percent cashout ratio is the highest Freddie Mac has seen since 1990, and close to the highest ever recorded. The reason for the extraordinarily high proportion of cashouts, according to Freddie's chief economist, Frank Nothaft, is that short-term interest rates on home equity lines are far higher than 30-year fixed rate mortgages. Consumers who need spendable cash find it cheaper to simply refinance their principal mortgage, rather than tack on a floating rate equity credit line.

Cashouts work like this: Say you have a $300,000 mortgage at 6 percent and your house is worth $500,000. You need $50,000 for a major home improvement or business investment project. Since you have plenty of home equity -- $200,000 -- you can tap it and convert $50,000 into cash quickly.

You have the choice of either taking out a floating-rate home equity credit line indexed to the current bank prime rate -- 7.75 percent -- or refinancing into a new $350,000 fixed rate principal mortgage at 6.5 percent. With Federal Reserve chairman Ben Bernanke hinting at another quarter-point increase in short-term rates soon -- taking the prime to 8 percent -- your choice is virtually a no-brainer.

That, in fact, is what tens of thousands of refinancers have been concluding, according to Nothaft.

"Almost no one is refinancing to reduce their interest rate in today's environment," he said. "The first quarter of 2006 is the first time in (five years) in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers."

As recently as mid-2003, just 33 percent of all refis were cashouts; 67 percent were pure rate-reduction transactions with no extra money extracted. Since 2004, however, as the Fed began nudging up short-term interest rates higher, steadily growing numbers of homeowners took the cashout route,which Freddie Mac defines as a post-refi balance at least five percent higher than the original balance.

Freddie Mac deputy chief economist Amy Crews Cutts predicts even more refis and cashouts later this year.

"Many borrowers will be looking to refinance this year when their adjustable rate mortgages hit the first rate reset (interest-only and payment option adjustables primarily) or as a low-cost way to fund a major project such as home improvements or to consolidate debt. The average rate on a 30-year fixed rate mortgage is at 6.5 percent, still well below the 35-year average rate of 9.4 percent" -- making cashout refis a relatively cheap and convenient source of money for most people.

Published: May 8, 2006

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.