Thanks to improvements in the housing market and overall economy, homeowners are once again using their properties as piggy banks – drawing cash from their home’s equity.
According to recent data from Moody’s, HELOC volume is now up 21 percent in the past two years to its highest level since 2008. Home equity lines of credit (HELOCs), which often serve as secondary loans, allow homeowners to pull cash out of their homes when they need it. This is still nowhere close to the level seen during the last housing boom, when many people treated their homes like ATMs, but the path is pointing upward, nonetheless.
Another trend we’re seeing is borrowers making smaller down payments on home loans, meaning they’re starting out their homeownership journey with less equity. They may be doing this to avoid paying more cash up front, or because they simply don’t have the cash to make a significant down payment. To put things into perspective, before the last housing boom, the median down payment was just over 7 percent. It dropped to 3 percent during the height of the boom, as unethical lending practices ran rampant with “creative” loan products that required little to no down payment.
Today, it seems homeowners are leaning toward more leverage, but they are doing so in a different environment than in 2006. Mortgage underwriting standards of today’s marketplace are far more strict than the lax guidelines of 10 years ago. Borrowers are now faced with the responsibility of proving their ability to repay the mortgage, including producing all financial documentation. Likewise, mortgage lenders are under much more careful scrutiny from the government as well as consumer watchdog groups.
Home equity continues to rise steadily, according to the Federal Reserve Board, and it is still rising faster than borrowers are withdrawing it.
Cash out refinancing is also making a comeback, thanks to homeowners having more substantial levels of equity. These mortgages are in the first lien position. In these cases, the borrower is often also removing their monthly private mortgage insurance, helping them save on their monthly payments. Even with slightly higher mortgage rates than a year ago, their monthly mortgage payments are often much lower given the absence of the monthly PMI component.
If you’re a Texas homeowner thinking about a cash out refinance, please reach out to us for details on the program and a free rate quote: (972) 591-3097