Real estate may be slumping in many local markets, but that has apparently not discouraged home owners from tapping their equity through cash-out refinancings.

Freddie Mac reported last week that 87 percent of all home mortgage refis during the quarter ending Sept. 30 involved cash outs. A cash out is defined by Freddie as any replacement loan that is at least 5 percent larger the previous. A total of $60.1 billion in equity was accessed by homeowners during the quarter either to finance consumer expenditures, fix up properties or buy investments.

The 87 percent figure contrasts with 2003 and 2004, when only 33 to 43 percent of all refi's involved extraction of equity.

Cash-outs work like this: Say you've got a $225,000 first mortgage on your $400,000 home. You need $75,000 to put in a new, gourmet kitchen, fix the roof and add a deck. You could take out an equity credit line, but your bank is quoting you prime plus one point -- 8 1/2 percent floating rate. Alternatively you could refinance your current mortgage and replace it with a $300,000 new first at a fixed rate in the low six percent range.

Freddie Mac chief economist Frank Nothaft ascribed part of the reason for the continuing strong pace of cash-out refi's to declining mortgage rates and the need on the part of some families to replace a "resetting" adjustable-rate loan with a fixed rate.

Many recent refinancers also are people who've owned their property for a few years and have now built sufficient equity to allow them to tap into it. According to the latest Federal Reserve study on household net wealth, American homeowners have a vast trove of equity to tap into if they choose -- about $10.851 trillion as of mid 2007. Though that number is down slightly from the first quarter, when it stood $10.857 trillion, according to the Fed, it's still well above where it was at the end of 2006, when it was estimated at $10.813 trillion.

Along with equity credit lines and second mortgages, cash-out refi's represent a key resource for consumers who need to unfreeze stored-up equity appreciation and "monetize" it--turn it into spendable cash.

Freddie Mac reports that in many cases, consumers using cash-outs end up with slightly higher interest rates on the replacement loan compared with the previous loan. This is especially true of households who last loan was originated during 2003-2004, when mortgage rates hit 40-year lows.

Published: November 12, 2007

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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, consumer 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.