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.
“From my standpoint, most people are cash-poor,” she said. “It’s an easy way to get access to the money.”
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.”
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