Refinancing for Cash? Join the crowd!
In 2021, more Americans have taken cash from cash-out refis than any time since the Financial Crisis of 2008. U.S. homeowners cashed out a record $152.7 billion in home equity last year, up from 42% since 2019 and the most since 2007, according to mortgage giant Freddie Mac.
Why the uptick? The pandemic has certainly brought challenges to us all. Many borrowers took out cash-refis in order to provide a cushion against an uncertain economy. Others used the cash to do home repairs, decorate, or redecorate, especially since the tight housing inventory has left potential home purchasers to remain in their current home.
The 2008 Great Recession and Now
One may wonder how the housing market, and specifically the cash-out refis differ now than during the 2008 financial crisis. Before the financial crisis, almost 90% of borrowers who refinanced chose to extract cash; last year, only one-third of refinancers chose the cash-out option. Homeowners also experienced more equity available to tap as home prices soared during the COVID-19 recession. Additionally, many have turned to cash-out refis as the average rate on a 30 year fixed mortgage fell below 3% for the first time last year. This was not the case in 2008 when homeowners borrowed from their homes but were left owing more than their homes were worth when home prices plunged. Economists now expect home prices to continue to climb as there is less supply and increased demand.
While many borrowers take advantage of cash-out refis, it is critical for borrowers to make sure that they do not fall behind in their mortgage payments. When homeowners refinance into new 30-year mortgages, they essentially reset the clock on their payments, increasing the life of their loan and resulting in paying interest payments for a lengthier period of time. Further, the 2017 tax overhaul did not allow borrowers to deduct the interest on the cash-out portion of the refi unless it was used to improve the home.
Borrowers who pay off their credit card debt with the cash they access from the cash-refis usually do so since mortgage interest rates are lower than customary credit card rates. However, mortgage loans are secured loans—meaning that borrowers who fall behind on their mortgage risk foreclosure. Bottom line: borrowers who use the cash to pay off debt must make sure that they continue making their monthly mortgage payment or risk losing their home to foreclosure.
Cash-out refis are a way for homeowners, who are not able to locate another home due to the tight housing market or who simply wish to stay long term in their current home and renovate, to literally tap into their equity.
The question as to how the housing market will change as the foreclosure and lease moratoriums eventually end, bringing with it potentially more housing inventory, remains to be seen. For now, cash-out refis are a hedge against the uncertainty as long as the mortgage loan is being kept current.
Should you wish to do a cash-out refi or refinance in general, our title company, Weston Title & Escrow, Inc. is able to help you. Feel free to contact our Weston Title team at 954-384-6168. For over 30+ years, we are here for you. Should you need assistance in purchasing, or have a legal question about a potential purchase, our team at Oppenheim Law is here for you, too, and we can be reached at 954-384-6114.
From the Trenches