Homeowners are taking advantage of their increased home equity, even with mortgage rates remaining high. Recent data shows that the second quarter of this year saw a spike in cash-out refinancing, reaching levels not seen in almost three years.
In a cash-out refinance, a homeowner borrows more than what they owe on their existing mortgage and keeps the extra cash. This money is often used to pay off debt, undertake home renovations, or make substantial purchases. The typical cash-out refinancing during this period involved homeowners withdrawing around $94,000 from their equity, leading to an increase in their monthly payments by about $590. Additionally, average interest rates on these loans rose by 1.45 percentage points.
To be eligible for a cash-out refinance, homeowners need to have at least 20% equity in their homes, have owned the property for a minimum of six months, and hold a credit score of at least 620. Those opting for cash-outs in the latest quarter had an average credit score of 719.
Rising home values have made this option appealing for many. The median price of existing U.S. homes reached a record high of $435,500 in June, marking a significant 48% increase over the past five years.
Homeowner equity in the U.S. also hit a remarkable $17.8 trillion in the second quarter, with about $11.6 trillion available for homeowners to access through refinancing.
Cash-out refinances now make up around 60% of all home loan refinances in this period. While these refinances can offer financial flexibility, they also carry risks. Borrowers often end up increasing their loan size and possibly facing higher interest rates, which can lead to extended repayment terms.
If homeowners find themselves unable to repay, they may be at risk of foreclosure due to diminishing equity. For some, a home equity line of credit (HELOC) could be a wiser choice. HELOCs typically have lower interest rates and allow homeowners to retain their equity.
The housing market has faced challenges since early 2022, as mortgage rates began to rise after reaching historic lows during the pandemic. Home sales dropped to their lowest level in nearly 30 years last year, and the market has remained sluggish in 2023. While home prices continue to rise nationally, the growth rate has slowed or even declined in many metro areas, particularly in cities like Atlanta, Austin, and Tampa.
This slowdown has affected home equity growth, decreasing it at the slowest rate in two years. In about 25% of U.S. markets, tappable equity has diminished by at least 5%. Alarmingly, around 1% of mortgaged homeowners, which equates to roughly 564,000 individuals, now owe more than their homes’ current value.
