Could it be time to cash out some home equity by refinancing your mortgage? For growing numbers of owners, the answer this year is an emphatic yes, at least according to new data from some major lenders.
In a cash-out refinancing, you convert part of your home equity into money, adding to your mortgage balance. Say you have a $400,000 home with a $200,000 first mortgage. You have $200,000 of equity and a couple of worthwhile projects in mind — paying off high interest rate credit card balances and renovating the house — that will cost you around $50,000. Since mortgage rates remain attractive in the 4 percent range and you can handle the higher monthly payments on a larger balance loan, you refinance your $200,000 existing loan and take out a new $250,000 loan to replace it. You end up with more debt, but you also walk away with roughly the $50,000 you need, less transaction fees.
Cash-outs were the rage during the housing boom years of 2004-2007. At their peak, in the third quarter of 2006, nearly nine out of 10 owners who refinanced pulled out money from their homes, according to mortgage investor Freddie Mac. But by late 2008, the bubble had imploded. Equity holdings plunged. Cash-out refis virtually disappeared.
Now, with home equity higher in many markets — especially along the Pacific and Atlantic coasts — cash-outs are making a comeback. Consider these summaries of in-house corporate data provided to me last week:
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▪ Bank of America saw the number of cash-out refinancings funded during the first quarter jump by 47 percent compared with the same period in 2014.
▪ loanDepot, a major non-bank mortgage originator, says its cash-outs during the first quarter were up by an extraordinary 78 percent compared with the same period a year earlier.
▪ LendingTree, which connects borrowers online with multiple lenders, reports that requests for cash-outs rose in the first quarter by 40 percent over the same period last year.
Though not all lenders are seeing the same trend, something significant appears to be underway. Quicken Loans, one of the largest mortgage originators, says total dollar volume of cash-outs is up this year, even though the cash-out percentage of all refinancings is slightly below what it was last year — around 20 percent of total refi business. Freddie Mac, which has not completed its first quarter refi analysis, said preliminary data indicate that there has been only a modest increase in cash-outs. Wells Fargo, the country’s highest-volume mortgage lender, told me that it is not seeing anything like the splashy jumps in cash-out volume reported by Bank of America or loanDepot.
What’s going on? Some lenders clearly are tapping into pent-up demand from owners who find themselves with growing equity and have financial needs prompting them to put some of it to use. Even lenders who are not recording dramatic growth in volume agree that a cash-out refi can be an important — and responsible — financial option for owners who can qualify.
But qualifying for a cash-out in 2015 is much tougher than it was during the see-no-evil underwriting years of the boom. As a general rule, you need to retain at least 20 percent equity in your home after the addition of the new debt. And you’ve got to document that you have the income to support payments on the higher debt load. Allyson Knudsen, executive vice president for national underwriting at Wells Fargo, says cash-out underwriting guidelines are “stricter than for traditional rate and term refinancings.” That means banks pay special attention to applicants’ debt-to-income ratios, purposes of the additional debt and credit profiles.
Bob Walters, chief economist for Quicken, told me that cash-outs are nothing like they were a decade ago. “People are not feeling like their homes are piggy banks” to dip into for everyday expenses, vacations and the like. Instead, most cash-out refi proceeds now go to debt consolidation and home remodelings — uses of credit that improve borrowers’ financial situations and help increase home values.
John Schleck, who heads Bank of America’s centralized and online sales, said in an interview that cash-outs “should never be the first thing borrowers think of” but rather be part of a thorough evaluation of their financial needs, resources and ability to handle more debt.
Bottom line: If you have a productive purpose for the money and can pass the underwriting tests, consider a cash-out while interest rates are still favorable. Run the numbers. They just might work.
Kenneth Harney is executive director of the National Real Estate Development Center.