By Ben Eisen and Christina Rexrode
Rising mortgage rates are crushing much of the refinancing
market. But Americans are still using refis to pull cash out of
their homes.
More than 80% of borrowers who refinanced in the third quarter
chose the "cash out" option, withdrawing $14.6 billion in equity
out of their homes, according to government-sponsored mortgage
corporation Freddie Mac. That is the highest share of cash-out
refis since 2007.
The trend attests to the current state of the U.S. economy,
which is more than nine years into an expansion that has lifted
home values sharply but raised worker pay at a much slower pace.
Now, many are finding their homes to be a tappable source of
wealth.
"Home equity is the big pot of gold," said Sam Khater, the chief
economist at Freddie Mac.
The increase is also a reminder of how rising mortgage rates are
roiling the market. Higher rates, which make buying a home more
expensive, are slowing down home sales. Rate-based refinancings,
where a homeowner gets a lower rate on their mortgage, are also
drying up, which has caused the higher proportion of cash-out
refis. The average rate on a 30-year fixed-rate mortgage is 4.81%,
according to data released Wednesday by Freddie Mac, up from 3.99%
at the end of last year.
In a cash-out refi, a homeowner essentially trades in a mortgage
for a new one with a larger principal balance. The borrower can
then pay off the old mortgage and still pocket a chunk of cash.
Lenders say that homeowners often use the cash for home renovations
or to pay down other debt.
Mandy Whitworth of Dallas completed a cash-out refi a few months
ago. She said she is happy that the roughly $75,000 in cash will
let her pay for a home addition and pay off a credit card, even
though she had to trade in a mortgage with a 3.625% interest rate
for one with a 5.75% rate.
"From my standpoint, most people are cash-poor," she said. "It's
an easy way to get access to the money."
Cash-out refis played a big role in the decade-ago housing
crisis, when many homeowners used their properties as ATMs just
before home prices plunged. But the amount of cash homeowners are
extracting now is far below precrisis levels, a sign that borrowers
and lenders are more cautious this time around. In 2006, there were
three straight quarters during which borrowers withdrew more than
$80 billion.
Summer Garrett, a mortgage loan originator at Homebridge
Financial Services Inc. in Dallas, said borrowers are showing more
interest in cash-out refis as home prices continue to rise in the
area, even though interest rates also are rising.
"Even with that higher interest rate, it is still less expensive
than other avenues," she said. The average rate on a credit card is
nearly 18%, according to Bankrate.com, a personal finance
website.
Still, some industry watchers worry the products could be
marketed to homeowners who don't understand them by lenders anxious
to keep up loan volume in a cooling housing market.
"There are issuers that really want to make their profitability
targets, " said Michael Bright, chief operating officer of
government-owned mortgage corporation Ginnie Mae. "The only way to
do it is to convince borrowers to take cash out of their
house."
A homeowner who uses money from a cash-out refi to pay down
other, higher-rate debt could still end up paying more in the long
run. A borrower who trades in a 4% mortgage for a 5% mortgage might
be able to pay off credit-card debt but could end up paying
thousands of dollars more in interest over the life of the
mortgage.
Borrowers who swap credit-card debt for mortgage debt are
essentially trading unsecured debt for secured debt, where the
repercussions for missing payments are much steeper. Borrowers who
miss mortgage payments can end up in foreclosure. Also, if home
prices fall, homeowners can end up owing more than their homes are
worth, which happened to many borrowers in the financial
crisis.
Mr. Bright said Ginnie Mae is "preparing to take additional
steps" to ensure "that borrowers aren't being solicited for
refinancings that don't make sense."
Ian Young, a cybersecurity architect who lives in Huntsville,
Ala., did a cash-out refi in 2016, pulling $50,000 out of his home
to cover the cost of renovations and pay down student loans. Since
then, he has incurred more debt from pursuing another degree. But
even though the value of his house has increased, he decided
against another cash-out refi.
"I would rather keep the mortgage low enough that I could still
sell the house and move," he said.
Nonetheless, some borrowers find cash-out refis attractive.
Jameson Wildwood, a software engineer in North Carolina, did a
cash-out refi over the summer on an investment property he owns in
Sacramento, Calif. He used the approximately $31,000 he pocketed to
make another real-estate investment.
"I think the market, especially in California and other areas,
has increased a lot, so there's a lot of equity that active
investors can use to make more investments," he said. "For me, it
was a great way of putting those funds to work."
(END) Dow Jones Newswires
November 25, 2018 08:15 ET (13:15 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.