With the rise of home values across the nation, more homeowners are tapping into their increased equity in the form of cash out mortgage refinances. However, homeowners who are doing so, are pulling the most conservative amounts in history.
According to Black Knight Financial Services, 42 percent of mortgage refinances last fall involved borrowers taking cash out of their homes, not just lowering their interest rates. That is the highest share since 2008.
The average cash-out amount was more than $60,000, but the average loan-to-value ratio after the refinance was 67 percent, the lowest level on record. Borrowers left 33 percent equity still in their homes, which is still considered a healthy level.
Before the housing crash of the last decade, too many homeowners used their homes like ATMs, withdrawing cash liberally, and as much as the banks would allow. At that time, the banks’ limits weren’t as strict, so it’s easy to see in hindsight how this practice led to millions of borrowers falling underwater on their home loans as home prices began to sink. According to Black Knight Financial Services, this also led to 7.1 million homes ending up in foreclosure.
With such a precarious home equity situation in our not-so-distant past, why are homeowners now easing back into pulling cash from their homes? It seems there are several factors at work here.
Rising Home Values
Home values have steadily been on the rise, indicating that the market is stabilizing and home values are getting back to normal in much of the country. This makes a cash out refinance far less risky.
Homeowners Aren’t Selling
Also, with less available homes for sale, those who currently own homes may feel like they won’t be able to find a home they like on the market right now. Therefore, they’re staying put and choosing to make improvements to their homes instead. Cash out refinancing can be a great way to fund much-needed repairs or renovations.
High Rents = Investment Opportunity
Additionally, with demand for rental housing skyrocketing (along with rent prices), many homeowners are taking out cash from their homes to use as a down payment on an income-producing property. Not only does this provide a way to purchase investment real estate, but it also allows homeowners to possibly lock in a lower interest rate on their primary residence.