Americans have hit the highest share of cash-out refinancing since 2007 warns a recent Wall Street Journal article by Ben Eisen and Christina Rexrode. Specifically, 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.
Refinancing a mortgage allows homeowners to pay for the first mortgage and receive cash for any of the equity they give up to the lender at the time of refinancing. Recent increases to home values have made homeowners more apt to refinance. When a home is worth more, lenders are willing to give homeowners more cash now (also known as debt to be paid later).
Several loan experts worry that homeowners deciding to cash-out refinance may be overlooking the long-term consequences due to recent increases to the mortgage interest rate. 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.
Eisen and Rexrode report, “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.”
A local specialist in home mortgages, Laura Jo Hewitt, a Vice President at Prime Meridian Bank, told Tallahassee Reports that refinancing is not on the rise in Prime Meridian Bank’s loan portfolio. Of the refinancing loans, Ms. Hewitt did not elaborate on how many were “cash-out” loans.
Ms. Hewitt says that people ordinarily cash-out refinance to renovate their homes, consolidate debt, or pay for taxes, typically in that order. Ms. Hewitt says that the decision to refinance depends on the rate of the first mortgage. And since mortgage interest rates are higher now than previous years, she helps clients avoid refinancing whenever possible by looking for cash elsewhere.
With rising interest rates, one may wonder why cash-out refinancing is rising?
Michael Bright, chief operating officer of government-owned mortgage corporation Ginnie Mae, has an answer. Mr Bright warns that when lenders are faced with a climate of consumers who do not want to refinance because of rising interest rates there “are issuers that really want to make their profitability targets. The only way to do it is to convince borrowers to take cash out of their house.”
As long as the banks limit mortgage financing to 80% of equity or appraised value and require a 20% down payment in cash, (not borrowed) there’s no risk now of the type of crisis we had in 2008.
I remember…before 2008 the government was encouraging banks to make no money down home loans to low income people that couldnt make the payments, then having Fannie and Freddie buy those loans from the banks without verifying credit quality. Add in the jacked up prices and appraisals by some who never left their office so the banks could process more loans…and a crisis was born.
For me the Federal government is most responsible because I dont think it would”ve happened if they hadn’t tried to “social engineer” low income people into houses they couldnt afford. The bankers are not without fault, but without a “legal path” sanctioned by the government, it wouldnt have happened…which is why not one person was ever sent to jail for any of this.