Should We Fear the Surge in Cash-Out Refinances?

<article class="post-2068 post type-post status-publish format-standard has-post-thumbnail hentry" id="post-2068"><span class="entry-date">March 23, 2021</span><div class="entry-header center-block text-center"><h1 class="entry-title">Should We Fear the Surge in Cash-Out Refinances?</h1><div class="shareBlock"><div class="shareTitle">Share</div><div class="shareIcons"><a aria-label="Twitter Share Link" class="twitter solid display-inline-block" data-tracking="Post,Social Post Link Clicked,Twitter" href="http://twitter.com/share?text=Should+We+Fear+the+Surge+in+Cash-Out+Refinances%3F&amp;url=https%3A%2F%2Fgilliggroup.com%2Fblog%2Fshould-we-fear-the-surge-in-cash-out-refinances%2F" target="_blank"><span class="force-hidden">Twitter</span></a>
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<p><img alt="Should We Fear the Surge in Cash-Out Refinances? | Simplifying The Market" class="webfeedsFeaturedVisual wp-post-image" decoding="async" link_thumbnail="" loading="lazy" sizes="auto, (max-width: 549px) 100vw, 549px" src="https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164800/20210323-KCM-Share-549×300.jpg" srcset="https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164800/20210323-KCM-Share-549×300.jpg 549w, https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164800/20210323-KCM-Share.jpg 750w" style="display: block; margin-bottom: 5px; clear:both;max-width: 100%;" width="358"/></p>
<p><em>Freddie Mac</em> recently released their <a href="http://www.freddiemac.com/research/datasets/refinance-stats/index.page">Quarterly Refinance Statistics</a> report which covers refinances through 2020. The report explains that the dollar amount of cash-out refinances was greater in 2020 than in recent years. A<em> cash-out refinance</em>, as <a href="https://www.investopedia.com/terms/c/cashout_refinance.asp">defined</a> by <em>Investopia</em>, is:<span id="more-44065"></span></p>
<blockquote>
<p><em>“a mortgage refinancing option in which an old mortgage is replaced for a new one with a larger amount than owed on the previously existing loan, helping borrowers use their home mortgage to get some cash.”</em></p>
</blockquote>
<p>The <em>Freddie Mac</em> report led to articles like the one published by <em>The Real Deal</em> titled, <em>House or ATM? Cash-Out Refinances Spiked in 2020,</em> which <a href="https://therealdeal.com/national/2021/03/11/house-or-atm-cash-out-refinancings-spiked-in-2020/">reports</a>:</p>
<blockquote>
<p><em>“Americans treated their homes like ATMs last year, withdrawing $152.7 billion amid a cash-out refinancing spree not seen since before the 2008 financial crisis.”</em></p>
</blockquote>
<p>Whenever you combine the terms “<em>spiked</em>,” “<em>homes like ATMs</em>,” and “<em>financial crisis</em>,” it conjures up memories of the housing crash we experienced in 2008.</p>
<p>However, <strong>that comparison is invalid</strong> for three reasons:</p>
<h4><strong>1. Americans are sitting on much more home equity today.</strong></h4>
<p>Mortgage data giant <em>Black Knight</em> just issued information on the amount of <a href="https://www.blackknightinc.com/blog-posts/tappable-equity-skyrockets-to-record-high-in-2020/"><em>tappable equity</em></a> U.S. homeowners with a mortgage have. <em>Tappable equity</em> is the amount of equity available for homeowners to use and still have 20% equity in their home. Here’s a graph showing the findings from their report:<a href="https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164757/20210323-MEM-Eng-1.png"><img alt="Should We Fear the Surge in Cash-Out Refinances? | Simplifying The Market" class="aligncenter wp-image-44066" decoding="async" height="488" loading="lazy" sizes="auto, (max-width: 650px) 100vw, 650px" src="https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164757/20210323-MEM-Eng-1.png" srcset="https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164757/20210323-MEM-Eng-1.png 1000w, https://files.simplifyingthemarket.com/wp-content/uploads/2021/03/22164757/20210323-MEM-Eng-1-400×300.png 400w" width="650"/></a>In 2006, directly before the crash, tappable home equity in the U.S. topped out at $4.6 trillion. Today, that number is <strong>$7.3 trillion.</strong></p>
<p>As <em>Black Knight</em> explains:</p>
<blockquote>
<p><em>“At year’s end, some 46 million homeowners held a total $7.3 trillion in tappable equity, the largest amount ever recorded…That’s an increase of more than $1.1 trillion (+18%) since the end of 2019, the largest percentage gain since 2013 and – you guessed it – the largest dollar value gain in history, to boot. All in all, it works out to roughly $158,000 on average per homeowner with tappable equity, up nearly $19,000 from the end of 2019.”</em></p>
</blockquote>
<h4><strong>2. Homeowners cashed-out a much smaller amount this time.</strong></h4>
<p>In 2006, Americans cashed-out a total of $321 billion. In 2020, that number was less than half, totaling $153 billion. The $321 billion made up 7% of the total tappable equity in the country in 2006. On the other hand, the $153 billion made up only 2% of the total tappable equity last year.</p>
<h4><strong>3. Fewer homeowners tapped their equity in 2020 than in 2006.</strong></h4>
<p><em>Freddie Mac</em> reports that 89% of refinances in 2006 were cash-out refinances. Last year, that number was less than half at 33%. As a percentage of those who refinanced, many more Americans lowered their equity position fifteen years ago as compared to last year.</p>
<h3><strong>Bottom Line</strong></h3>
<p>It’s true that many Americans liquidated a portion of the equity in their homes last year for various reasons. However, less than half of them tapped their equity compared to 2006, and they cashed-out less than one-third of that available equity. Today’s cash-out refinance situation bears no resemblance to the situation that preceded the housing crash.</p>
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