NEW YORK (CNN/Money) -
The pace of mortgage refinancing has not slowed, according to a new report from Freddie Mac. But the primary reason for refinancing may have changed.
In a growing proportion of refinancings, homeowners are taking major amounts of cash out of the transactions.
In the quarter ended June 30, 74 percent of Freddie Mac-owned loans that were refinanced resulted in principal amounts larger by at least 5 percent.
Only 9 percent of refinancings resulted in lower loan amounts.
In other words, nearly three-quarters of homeowners refinancing a $100,000 loan wound up with a loan principal of at least $105,000, usually more...the difference between the size of the old loan and the new loan is being taken out in cash.
In 2003, that was the case only 33 percent of the time. Back then refinancing was rate driven, according to Bob Moulton of Americana Mortgage Group. Homeowners reworked mortgages to take advantage of lower interest rates so they could reduce their monthly bills.
Now they refinance to put cash in their pockets or to pay for big purchases.
Where's the money going?
The homeowners spend much of the money on their homes. The latest figures from Harvard's Joint Center for Housing Studies report that Americans paid out $133 billion for home improvements in the 12 months ended June 30.
Others take out cash to buy motor vehicles, pay for the kid's college, or to pay down other debt, all of which can be legitimate uses for the money, especially if it enables homeowners to avoid or eliminate high-interest debt such as from credit cards.
Borrowers shouldn't drain their home equity for frivolous purposes, however, and then hope for increasing house prices to replenish it. That could be risky.
"For the typical family, home equity accounts for the bulk of their wealth," said Frank Nothaft, chief economist for Freddie Mac.
Fortunately, most families are practicing responsible refinancing. "The average loan-to-value ratio after refinancing is still 70 percent," Nothaft said, which means homeowners are being pretty conservative.
He also points out that the number one use the money is being put to is home improvement, "which enhances the home's value."
Other good uses include retiring more expensive debt. Mortgage loans are far better for the borrower than high-interest credit card or auto loans and can even have advantages over student loans, said Moulton, "The government is a partner in paying off mortgages." Not only are interest rates lower than other loans, the interest is also tax deductible.
Moulton reports that some of his customers are using their cash-outs to buy more real estate. "I have a client who is looking to tap $400,000 to buy a second home in the Berkshires."
That's only risky if real estate prices drop.
Freddie Mac expects rising mortgage rates to dampen enthusiasm in the housing market later this year. If that occurs, homeowners would have to grow home equity the old fashioned way, by paying off mortgage loans.
Alan Greenspan says Freddie Mac's operation may pose a risk to the U.S. economy. For more on that story, click here.
Some homeowners are getting ripped off when they refinance. For more, click here.