The last time cash-out refinances were this popular, George Bush was in office, the Boston Red Sox had just won the World Series, and the Lehman Brothers were still in business. Using home equity as a virtual ATM was very much in vogue. But this time, as 2022 kicks off, we’re looking at a whole different world of cash out refinances.
With refi rates currently sitting at historic lows, homeowners have the option to cash-in on their home equity while still maintaining extremely manageable monthly mortgage payments. Whether a homeowner wants to tap into their home equity to pay for home renovations or improvements, or consolidate debt, or cover a major event like a wedding or their kid’s college tuition, a cash-out refinance is a great way to go.
And with U.S. homeowners applying for cash-out refinances at the highest rate in a decade and a half, it’s clear that the historically low interest rates we’ve been seeing is a major driver. Per Bankrate and mortgage data tracker Black Knight, borrowers cashed in on $70 billion of home equity in the summer of 2021 alone.
Here’s Why It’s Not 2007 All Over Again
Let’s take a quick ride in the mortgage time machine, blasting back to 2007. A year that saw homeowners pulling record amounts of equity from their properties during the refi boom. Unfortunately, this led to a foreclosure bubble, followed by the housing market crash we’re all far too familiar with.
The good news: this current refi boom is absolutely nothing like the last one. That’s because this time, unlike last time, homeowners are taking out much less on average in their cash-out refinances. It appears the lessons of the past have been well learned, with conservative refinances winning the day, ensuring security in the housing market and way less foreclosures overall.
The key is securing a low rate on your cash-out refinance. With current refi rates sitting between 2-3%, homeowners are able to cash in on their equity while simultaneously avoiding risk. The bottom line: right now is a great time to take cash-out in a refinance while also minimizing your monthly mortgage payment.
The Refi Summer of 2021 As an Economic Indicator
So yes, that $70 billion number taken out in cash-out refinances this past summer seems like a big number. But, according to Black Knight, that number represented less than 1% of available home equity at the time.
When comparing that metric against the 2007 refi boom, the current cash-out refinance frenzy is clocking in at less than a third of the rate homeowners were cashing-in at a decade and a half ago. That’s enough to make us draw the conclusion that this time is different: by cashing-in on cash-out refinances at record low interest rates, homeowners are actually making an extremely financially savvy move this time around with their refis.
Couple that with the fact that lenders are far more risk averse in the current mortgage markert, and you start to see that calamity is absolutely not on the horizon this time around. The average credit score for current mortgage borrowers is nearing the 800 mark, which is a far cry from what we saw in 2007. New York’s Federal Reserve Bank released a report showing that Q1 of 2021 actually saw record high credit scores of the median refinancer standing at 788.
Credit Scores and LTVs Show That Refinancing Now Is the Right Move
That last refi boom all the way back in 2007 saw credit scores in the low 700s on average. That Great Recession is now a distant memory, with less than 25% of refinancing homeowners currently holding credit scores under the 730 mark. The New York Fed’s recent report also shows just under 10% of borrowers with scores under 680.
The Loan to Value ratios, or LTVs, are also looking good. Home values are through the roof right now, with an 18% increase from Q3 of 2020 to Q3 of 2021, according to the FHFA (Federal Housing Finance Agency). This indicates a market where homeowners genuinely have home equity they can tap into while not exposing themselves to significant risk.
With the average borrower’s mortgage debt at just 45.2% of their properties’ appraised value, the time to refinance has never been better. Rates at or even below 2% are out there for borrowers, and home equity is booming. In summary, refinancing in 2022 seems like the right move to make for many, which is why we expect to see the trend continue to rise through the year.