Borrowers Are Tapping Their Homes For Cash, Even As Rates Rise (#GotBitcoin?)
Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes.
More than 80% of borrowers who refinanced in the third quarter chose the “cash out” option, withdrawing $14.6 billion in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac . That is the highest share of cash-out refis since 2007.
The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth.
“Home equity is the big pot of gold,” said Sam Khater, the chief economist at Freddie Mac.
The increase is also a reminder of how rising mortgage rates are roiling the market. Higher rates, which make buying a home more expensive, are slowing down home sales. Rate-based refinancings, where a homeowner gets a lower rate on their mortgage, are also drying up, which has caused the higher proportion of cash-out refis. The average rate on a 30-year fixed-rate mortgage is 4.81%, according to data released Wednesday by Freddie Mac, up from 3.99% at the end of last year.
In a cash-out refi, a homeowner essentially trades in a mortgage for a new one with a larger principal balance. The borrower can then pay off the old mortgage and still pocket a chunk of cash. Lenders say that homeowners often use the cash for home renovations or to pay down other debt.
Mandy Whitworth of Dallas completed a cash-out refi a few months ago. She said she is happy that the roughly $75,000 in cash will let her pay for a home addition and pay off a credit card, even though she had to trade in a mortgage with a 3.625% interest rate for one with a 5.75% rate.
“For me, I don’t have that much cash on hand,” she said. “It allowed me to pull out equity from the home to reinvest in the repairs and addition.”
Cash-out refis played a big role in the decade-ago housing crisis, when many homeowners used their properties as ATMs just before home prices plunged. But the amount of cash homeowners are extracting now is far below precrisis levels, a sign that borrowers and lenders are more cautious this time around. In 2006, there were three straight quarters during which borrowers withdrew more than $80 billion.
Summer Garrett, a mortgage loan originator at Homebridge Financial Services Inc. in Dallas, said borrowers are showing more interest in cash-out refis as home prices continue to rise in the area, even though interest rates also are rising.
“Even with that higher interest rate, it is still less expensive than other avenues,” she said. The average rate on a credit card is nearly 18%, according to Bankrate.com, a personal finance website.
Still, some industry watchers worry the products could be marketed to homeowners who don’t understand them by lenders anxious to keep up loan volume in a cooling housing market.
“There are issuers that really want to make their profitability targets,” said Michael Bright, chief operating officer of government-owned mortgage corporation Ginnie Mae. “The only way to do it is to convince borrowers to take cash out of their house.”
A homeowner who uses money from a cash-out refi to pay down other, higher-rate debt could still end up paying more in the long run. A borrower who trades in a 4% mortgage for a 5% mortgage might be able to pay off credit-card debt but could end up paying thousands of dollars more in interest over the life of the mortgage.
Borrowers who swap credit-card debt for mortgage debt are essentially trading unsecured debt for secured debt, where the repercussions for missing payments are much steeper. Borrowers who miss mortgage payments can end up in foreclosure. Also, if home prices fall, homeowners can end up owing more than their homes are worth, which happened to many borrowers in the financial crisis.
Mr. Bright said Ginnie Mae is “preparing to take additional steps” to ensure “that borrowers aren’t being solicited for refinancings that don’t make sense.”
Ian Young, a cybersecurity architect who lives in Huntsville, Ala., did a cash-out refi in 2016, pulling $50,000 out of his home to cover the cost of renovations and pay down student loans. Since then, he has incurred more debt from pursuing another degree. But even though the value of his house has increased, he decided against another cash-out refi.
“I would rather keep the mortgage low enough that I could still sell the house and move,” he said.
Nonetheless, some borrowers find cash-out refis attractive. Jameson Wildwood, a software engineer in North Carolina, did a cash-out refi over the summer on an investment property he owns in Sacramento, Calif. He used the approximately $31,000 he pocketed to make another real-estate investment.
“I think the market, especially in California and other areas, has increased a lot, so there’s a lot of equity that active investors can use to make more investments,” he said. “For me, it was a great way of putting those funds to work.”
Americans Are Taking Cash Out of Their Homes—And It Is Costing Them
Many homeowners pay higher rates after refinancing their homes to tap home equity, but the trade-off often makes sense.
Many Americans who need cash are taking it out of their homes. The trade-off: higher interest rates.
Over the past two years, a big chunk of homeowners took on higher interest rates when they refinanced to tap their home equity. These cash-out refinancings, as they are known, free up money homeowners can use to pay down credit-card debt, renovate or invest in a new property.
Nearly 60% of cash-out refinancings in 2018 came with higher interest rates, the biggest share since before the financial crisis, according to Black Knight Inc., a mortgage-data and technology firm. This year, that number fell to around 44% of cash-out deals, but it remains at more than three times its average between 2009 and 2017.
This corner of the mortgage market illuminates the crosscurrents in the U.S. economy: After roughly a decade of rising home prices, homeowners are flush with record amounts of home equity they can tap. But many Americans remain short on cash and are increasingly relying on debt to fund their lives.
“There’s something in their life that is causing them to need money,” said Sam Polland, a mortgage-loan officer at Sandy Spring Bank in Rockville, Md. “They are willing to go up in rate to get the equity out of their house.”
For some homeowners, the trade-off is worth it. While mortgage rates have crept up, they are still lower than what borrowers would pay if they tapped a credit-card or home-equity line of credit.
Cash-out refis made up a significant share of refinancings in the third quarter, helping fuel a rebound in the mortgage market after a dismal 2018. Led by refis, lenders originated $700 billion in mortgages in the third quarter, the most since before the financial crisis, according to industry research group Inside Mortgage Finance.
The average 30-year fixed mortgage rate has been under 4% for much of the year. That is low by historical standards, but higher than periods in 2012, 2013, 2015 and 2016 when borrowers last flooded the market. Black Knight found that 39% of the people who did cash-out refis in the third quarter had obtained their mortgages during those four low-rate years.
Paul Thompson, who works in product development, got a mortgage at 4% when he bought his Dallas house in 2015. This month, he refinanced at 4.625% and took out about $30,000.
The higher rate was worth it, he said, because it gave him the cash to renovate an investment property next door that he bought this fall. His parents are planning to move in once it is finished.
“It just gives me some cushion should I have to go back to being self-employed,” said Mr. Thompson.
Summer Garrett, Mr. Thompson’s loan officer at Caliber Home Loans Inc., said cash-out deals made up about 30% of her business over the past few months. Many clients use them to pay off credit-card debt, she said.
The use of cash-out refinancings worries some economists because it echoes the precrisis era, when homeowners used their homes like ATMs. Consumers who struggle to pay mortgages that have swelled due to a cash-out refinancing risk losing their homes. Credit-card debt, by contrast, is unsecured.
But the volume of cash-out refinancings remains well below precrisis levels. And many lenders say this type of activity isn’t uncommon deep in an economic expansion marked by rapid home-price growth in much of the country.
Cash-out refinancings also look increasingly attractive next to home-equity lines of credit. The 30-year fixed mortgage rate has fallen at a much faster pace than Heloc rates this year because they are based on different benchmark rates that haven’t moved in tandem.
In September, the average 30-year mortgage rate was almost 3 percentage points lower than the average Heloc rate, the biggest gap on records going back to 1992, according to personal-finance website Bankrate.com.
Homeowners sometimes lower their rates through cash-out deals.
Matthew Miller traded in an adjustable-rate mortgage at 4.75% for a 30-year fixed-rate loan at 3.5% this fall.
The New York-based architect took out the ARM last year to finance the purchase of a home in Sagaponack, N.Y. Because the house wasn’t up to code, he had trouble finding a lender and accepted a rate higher than the market rate as a result.
He renovated the property to bring it up to code, allowing him to refinance into a fixed-rate mortgage. The renovation also increased his equity; he pulled out $350,000 through a cash-out refinancing to cover the construction costs.
“It was a stressful process, definitely,” he said. “But now that it’s done it feels really good.” Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their,Borrowers Are Tapping Their
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