Many Americans who need cash are taking it out of their homes but at higher interest rates.
Over the past two years, a big chunk of homeowners have refinanced to tap their home equity–cash-out refinancings, as they are known–to free up money to pay down credit-card debt, renovate or invest in a new property.
Nearly 60% of cash-out refinancings in 2018 came with higher interest rates, the biggest share since before the financial crisis, according to Black Knight Inc., a mortgage-data and technology firm. This year, that number fell to around 44% of cash-out deals, but it remains at more than three times its average between 2009 and 2017.
Making sense of the story:
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For some homeowners, the trade-off is worth it. While mortgage rates have crept up, they are still lower than what borrowers would pay if they tapped a credit-card or home-equity line of credit.
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The average 30-year fixed mortgage rate has been under 4% for much of the year. That is low by historical standards, but higher than periods in 2012, 2013, 2015 and 2016 when borrowers last flooded the market.
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The use of cash-out refinancings worries some economists because it echoes the pre-crisis era, when homeowners used their homes like ATMs. Consumers who struggle to pay mortgages that have swelled due to a cash-out refinancing risk losing their homes. Credit-card debt, by contrast, is unsecured.
Source: WSJ