Americans extracted more cash from their homes through cash-out refinancings in 2020 than in any year since the financial crisis.
U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant
It was a blockbuster year for mortgage originations in general as well: Lenders churned out more mortgages than ever in 2020, fueled by about $2.8 trillion in refis, according to mortgage-data firm Black Knight Inc.
Some borrowers viewed cash-out refis as a way to cushion themselves against an uncertain economy last year. Others wanted to build and redecorate, and being stuck at home gave them the time to do the paperwork. Homeowners also had more equity available to tap: Though home prices tend to fall during economic downturns, they jumped during the Covid-19 recession.
“The support coming from home equity is unparalleled in helping smooth out the degradations from Covid,” said
an economist and professor at the University of Pennsylvania. “For those who are in the position to refinance, it’s a major source of support.”
The median existing-home price rose to about $310,000 in December, an increase of almost 13% from December 2019. The acceleration in price growth has spread past cities to suburban and rural areas as Americans re-evaluate where they want to live during and after the pandemic.
Cash-out refis got a bad rap after they exploded in the run-up to the 2008 financial crisis. Borrowers tapped their homes like they were ATMs. When home prices plunged, they were left owing more than their homes were worth. Now, in 2021, many economists expect home prices to keep growing.
“There are genuinely a lot of people who want to buy homes to live in,” said
chief economist at real-estate brokerage
“They’re not just buying them to buy them or speculating that home prices will continue to rise. People are buying because they want them and they’re not trying to sell again the next year.”
Low rates—the average rate on a 30-year fixed mortgage fell below 3% for the first time last year—also made cash-out refis appealing. They could become less popular if mortgage rates continue to rise, as they have in recent weeks.
Cash-out refis let borrowers essentially swap their current mortgage with a fresh one that has a higher balance. That allows a homeowner to pay off the old mortgage and still have cash left over.
The median credit score of new refis last year approached 800, near the top of the scoring range, according to the Federal Reserve Bank of New York. That includes refis in which the borrower didn’t take cash out.
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Todd Kennedy lowered the mortgage interest rate on his North Texas home by almost a percentage point when he refinanced late last year. Mr. Kennedy, who has a credit score around 780, also cashed out about $30,000 in equity to pay for home improvements including repairs to his home’s foundation and new flooring.
Mr. Kennedy said he started considering a refi when his mortgage company,
Mr. Cooper Group Inc.,
reached out with an offer last November.
“They said, ‘Hey, you’ve already got equity. We can do a lower rate and get cash back,’” Mr. Kennedy said.
Wendi Comello of St. Louis closed on a cash-out refi last week. It was made easier by her home’s steep price appreciation. She bought it for close to $95,000 in 2014. It appraised for about $150,000 this year.
Ms. Comello used the cash to pay off two loans worth a combined $8,000, including one that helped her with the down payment on her Federal Housing Administration mortgage. She also plans to pay off credit-card debt and renovate her 1950s-style kitchen, including adding more cabinet space for her growing collection of kitchen gadgets.
Still, Ms. Comello’s credit score in the 600s prevented her from locking in a lower rate. The refi pushed her mortgage rate up to 4.3% from 4%, and her monthly payment went up by about $50.
There can be other pitfalls to cash-out refis. When homeowners refinance into new 30-year mortgages, they essentially reset the clock on their payments. Over time they can add years to the life of their loan and as a result end up paying tens of thousands of dollars in additional interest, not to mention closing costs.
Additionally, the 2017 tax overhaul said that borrowers typically can’t deduct the interest on the cash-out portion of a refi unless it is used to improve a home.
Some borrowers like the idea of paying off credit-card debt with their cash-out refis, since mortgage interest rates are much lower than the typical credit-card rate. But a mortgage, unlike a credit card, is a secured loan. That means that borrowers who fall behind on credit-card payments don’t risk losing an asset, while borrowers who fall behind on home loans risk foreclosure.
Eric Henning, a mortgage loan officer in Gig Harbor, Wash., said a number of his customers have taken out larger-than-usual sums of cash to do major renovations or additions. Tight housing inventory—the number of homes for sale is at an all-time low—has made it hard for families who are looking for larger homes.
“They can’t find a house to move into, so they’ve basically decided to make their homes work long term,” Mr. Henning said.
Still, borrowers who did major cash-out refis withdrew an average of $50,000 last year, down from $59,000 the year before, according to the New York Fed.
Before the housing-market crash that followed the financial crisis, almost 90% of borrowers who refinanced chose to extract cash. Last year, about one-third of refinancers chose the cash-out option, according to Freddie Mac.
Write to Orla McCaffrey at [email protected]
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