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.”