Persistently low mortgage rates are pushing homeowners to withdraw cash from their homes at the highest levels since the financial crisis, according to new data from Black Knight, a mortgage analytics firm.
Black Knight reports that in the fourth quarter, some 600,000 homeowners withdrew approximately $41 billion in equity from their homes through cash refinances. This is the largest quarterly volume since mid-2009, when the world was still reeling from the housing crisis. Cash outflows have increased in each of the previous three quarters, says Black Knight.
With mortgage rates remaining below 4%, cash-out refinancing may remain an attractive option for borrowers for some time. The trend has already been on the rise for a few years, but it’s less worrying than in the go-go years of the early 2000s.
“The term ‘cash-in refinance’ still conjures up images of the real estate boom and bust when landlords collectively withdrew more than $1 trillion in equity between 2004 and 2007, but saw landlords massively upside down and creeping foreclosures when the bubble burst,” says Greg McBride. , CFA, Chief Financial Analyst at Bankrate. “Not only are lending standards now much stricter, but today’s volume pales in comparison to then.”
Cash refinances are increasing along with global refinances, as borrowers rush to take advantage of mortgage rates that have fallen significantly from a year ago. Mortgage applications are 476% higher than a year ago. The coronavirus pandemic has pushed mortgage rates down amid fears of a global recession.
Should Borrowers Use Cash Refinance?
Although the horror stories of the housing crisis may make some borrowers hesitant to refinance, it may make sense in certain scenarios.
“Many homeowners remain understandably reluctant to take equity out of their homes,” McBride says. “And that shouldn’t be taken lightly, especially if you’re using that equity and your home as collateral to pay off unsecured debt. But savvy homeowners have used cash refinancing as a low-cost source of funds for other investment or business opportunities.
If you are refinancing by cash-out, it is important to understand when it’s the right option. A big advantage, of course, is being able to access more money at a lower rate. But the key is how you spend that money. It can be useful for improving your home or paying off high-interest debt, but it’s not a good idea to use these funds for day-to-day expenses.
Of course, any increased monthly payment also carries additional risk, so it’s important to balance the risk against the need for cash.
“Be careful in the risk you take on taking home equity,” McBride says. “If your home’s value drops sharply, you may owe more than the home is worth, but without that, the higher monthly payment could be a constraint in a tougher economic climate.”
Even if you don’t opt for a cash-out refinance, it may still be a good idea to take advantage of the rates and refinance with a lower payment. Here’s how to run the numbers to see if it works for you.