Remember back when you refinanced your home mortgage to get a lower interest rate and pay less every month?
How quaint. And how utterly out of date. Now the rage is refinancing into a higher interest rate - yes, you read that correctly - while pulling out buckets of fresh cash.
Almost 9 out of 10 homeowners who refinanced during the second quarter of this year "cashed out" additional money - often tens of thousands of dollars and more - according to mortgage investment giant Freddie Mac.
The 88 percent cash-out refinancing rate was close to the all-time record, and could surpass it later this year.
Meanwhile, the typical refinancer hasn't been scouring the market for an interest rate lower than his or her existing first mortgage.
To the contrary, according to Freddie Mac, most refinancers are opting for larger replacement first mortgages with rates averaging about a half-percentage point higher than on their old loan.
Cash-outs may be booming, but they are not a new phenomenon. They've existed for years as a financial tool to extract equity tied up in real estate and to convert it to immediately spendable money.
During the refinancing boom years of 2003 and 2004, for example, anywhere from a third to a half of all refinancers pulled out some additional cash, but the overwhelming majority of borrowers during the go-go refinancing years chose traditional rate-reduction replacement mortgages where the new balance approximated the old balance, and the new monthly payment was lower than the old.
Scroll ahead to mid-2006: Short-term interest rates no longer hover near 4 percent. Thirty-year fixed-rate first mortgages no longer are in the 5s. Now the prime rate is 8 1/4 percent and could move higher. Standard 30-year mortgage rates are nudging 7 percent.
Home-equity credit lines are slumping as their adjustable rates - typically set 1 or more points above the bank prime - start racking up bigger monthly costs.
Now consider the near-record pace of cash-out refinancing: Say you need $40,000 to $100,000 for a home improvement, a business investment, a down payment on a vacation property or to consolidate high-cost consumer credit debts.
Say you also have lots more than $100,000 sitting untouched and frozen in home equity. Rather than signing up for a home equity credit line tied to a jumpy and unpredictable prime rate, plus 1 percent, you instead opt for a fixed-rate cash-out refinancing.
