Homeowners leery of cashing out equity

Mark Alexander is optimistic about his neighborhood and city's economic prospects. So when falling interest rates lured him to refinance his Southwest Center City home yesterday, he might have cashed out some of his equity, as many borrowers did through much of the long housing boom.

But Alexander took a more conservative tack. He and his wife, Sarah Biemiller, replaced their 6.5 percent interest rate with a 5.125 percent 30-year fixed-rate mortgage. Even after rolling in closing costs, they'll save more than $300 a month.

Homeowners such as Alexander, a manager at the Center City District, illustrate the limits facing policymakers hoping to boost the economy by pushing down mortgage rates: Borrowers who have learned from the deflation of the housing bubble are reluctant to again start spending equity - the kind of spending that long helped fuel the broader economy.

The Federal Reserve has gotten at least some of the traction it wanted when it announced plans a month ago to reinvigorate the housing market.

Interest rates are down. Freddie Mac said last week that borrowers paid an average of 5.19 percent for a 30-year fixed-rate mortgage - the lowest since the government-backed corporation started its survey in 1971.

Mortgage activity is rising. The Mortgage Bankers Association said that for the week ended Dec. 12, applications were up 3 percent from the previous week and up 37 percent compared with a year before.

But more than three-fourths of the applications were for refinancing, more than any time in the last five years. And for the first nine months of 2008, Freddie Mac says, borrowers cashed out $99 billion in home equity through refinancings - half of what they extracted during the same period in 2007.

At least anecdotally, cash-out refinancings have become even less popular since the Wall Street meltdown this fall.

"People are scared," said Eileen Marolla, the loan officer at Philadelphia Mortgage Advisors who arranged the mortgage for Alexander and Biemiller. "A couple of years ago, people were pulling cash out like crazy, and adding rooms or adding on third floors. Now the market is way more conservative than I've ever seen it."

Alexander and Biemiller themselves benefited from the rising tide of home prices. In 1999, Alexander bought a house in Queen Village for less than $90,000. Three years later, after investing about $20,000 in improvements, he sold it for nearly $250,000.