June 15th, 2017 7:17 AM by Jackie A. Graves, President
refinancing their mortgages are taking cash out in the process at levels not
seen since the financial crisis.
half of borrowers who refinanced their homes in the first quarter chose the
cash-out option, according to data released this week by Freddie Mac. That is
the highest level since the fourth quarter of 2008.
cash-out level is still well below the almost 90% peak hit in the run-up to the
housing meltdown. But it is up sharply from the post-crisis nadir of 12% in the
second quarter of 2012.
In a cash-out refi, a borrower refinances an existing mortgage
with a new one, typically at a lower borrowing cost, that has a higher
principal balance than the existing one. This allows the homeowner to pay off
the old mortgage and still have cash left over for other uses.
growing popularity of cash-out refis has helped buoy refinance activity. After
booming for several years, demand for refinance mortgages had begun to slow as
the Federal Reserve began increasing short-term interest rates and longer-term
bond yields moved higher.
Mortgage rates remain low by historical standards, though. The
average rate for a fixed, 30-year mortgage was 3.95%, Freddie Mac reported this
rising home prices have helped increase the equity homeowners have in their
houses. This allows more people to refinance to capture the benefit of lower
borrowers whose homes are rising in value are often more likely to be
interested in refinancing for cash. For example, in Denver and Dallas, where
home prices have jumped, more than half of refinancers opted for cash last
year, according to Freddie Mac.
some housing-market observers, the fact that more homeowners are tapping their
homes for cash represents a healthy confidence in the economy. It comes against
a backdrop of continued gains in employment.
the same time, the increasing use of cash-out refis causes some concern since,
in the run-up to the financial crisis, borrowers used their homes like
Kiefer, Freddie Mac’s deputy chief economist, says this time has been
different. Borrowers now are subject to stricter standards when they get a loan
or refinance a mortgage. There is also less money at stake now than a decade
refis in the first quarter represented about $14 billion in net home equity
compared with more than $80 billion in each of three straight quarters in 2006.
On an annual basis, total home equity cashed out in 2016 was $61 billion,
according to Freddie Mac, versus $321 billion in 2006.
despite the recent increase in users, the proportion of refinancers opting for
cash is much lower than in pre-crisis days, when it peaked at nearly 90% in
more, consumer balance sheets are far stronger than they were a decade ago.
Mortgage debt-service payments as a percentage of disposable personal income
fell to 4.4% in the fourth quarter of 2016, according to Federal Reserve data.
That is the lowest level since early 1980.
have been using cash-out for years,” Mr. Kiefer said. “From a personal-finance
standpoint, it can make a lot of sense.”
One example is a borrower using
the cash from a refinance to consolidate credit-card debt that has far higher
yields. That in many cases can produce a big savings in debt-servicing costs by
replacing debt that has double-digit interest rates with a loan that has a rate
in the low single digits.
Stefanos Chen - To view the original article click here