The amount of U.S. consumers choosing to take cash out of their home equity will fall sharply in 2006 versus last year due to lower refinancing activity and slower home price appreciation, Freddie Mac said on Tuesday.

Home equity extraction from the refinancing of prime first mortgage liens will fall to about $117 billion in 2006 -- less than half the 2005 level of $243 billion, according to Frank Nothaft, Freddie Mac vice president and chief economist.

In the fourth quarter of 2005, 80 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to the mortgage finance company's quarterly refinance review.

That percentage is up from the third quarter of 2005, when the share of refinanced loans that took cash out was 73 percent. Activity was at its highest level since the third quarter of 2000 when it stood at 81 percent, the cash-out refinance report said.

"The refinance share of mortgage applications in the fourth quarter of 2005 was 45 percent while the average rates on 30-year fixed-rate mortgages climbed 0.4 percentage point and 1-year Treasury-indexed adjustable mortgage rates jumped 0.6 percentage point from third-quarter averages," said Nothaft, in a press release accompanying the report.

This year, Freddie Mac expects the refinance share of mortgage applications to fall to around 37 percent.

Home prices will grow at an average rate between 6 percent and 8 percent nationally in 2006, the company said.

The company expects 30-year fixed mortgage rates to average three-tenths of a percentage point higher in 2006 relative to 2005. A rise of seven-tenths of a percentage point is expected on the average rate on one-year Treasury-indexed adjustable rate mortgages.

"We see from the cash-out analysis that the overwhelming majority of these borrowers were extracting home equity rather than trying to reduce their monthly payments," Nothaft said.

COPING WITH THE FED'S RATE HIKES

The big reason borrowers are using the cash-out refinance option is that the string of rate hikes by the Federal Reserve Board pushed the rates higher on home-equity loans. These loans are typically linked to the prime rate, which is currently at 7.5 percent, while 30-year fixed-rate mortgages are near 6.25 percent presently, he said.

Activity was very strong in the fourth quarter, even with higher interest rates, according to Amy Crews Cutts, Freddie Mac's deputy chief economist.

A large share of borrowers took cash out when refinancing their mortgages, and that combined with strong overall refinance volume, led to extraction of home equity through prime-lien refinances of $70.3 billion -- slightly higher than the revised third-quarter estimate of $67.2 billion.

"We expect the share of all refinance borrowers who take out cash to remain high in 2006 because of the relatively high cost of second mortgages and home-equity lines of credit," Cutts said in the release.

In the fourth quarter of 2005, the median ratio of old-to-new interest rate was 1.02, or one-half of those borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was at least 2 percent higher than the new interest rate, the report said.

In the fourth quarter of 2005, homeowners who refinanced lowered their interest rate an average of 0.35 percentage point, Cutts said.

The cash-out refinance report also showed that properties refinanced during the fourth quarter of 2005 experienced a median house-price appreciation of 27 percent during the time since the original loan was made, up from 24 percent in the third quarter, the company said.

Freddie Mac's estimates come from a sample of properties on which the company has funded at least two successive loans. Transactions are then screened to verify the last loan was for refinancing and not purchasing. The analysis does not track the use of funds made available from these refinances.

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