The Return of Cash-Out Refinances

December 7, 2018

Over the span of the last 6 years, home prices have dramatically appreciated. The increase in home prices have increased home equity levels. The number of "cash-out" refinances has been increasing, coming close to the numbers seen during the 2008 crash. 

 

The high number of these cash-out refinances has spiked some fear about repeating the same mistake many homeowners made in 2008. Digging deeper, however, shows that homeowners are handling their home equity more responsibly now. 

 

What happened in 2008?

 

When home prices rose dramatically 10 years ago, people treated their home as an ATM. Homeowners began to refinance their homes and then convert the equity into cash, this is called a cash-out refinance. With prices appreciating with such speed, homeowners would tap into their equity many times. 

 

After tapping into their equity, homeowners were left with almost no equity left in their homes. When prices began to decrease, many homeowners entered a negative equity situation, the mortgage amount was higher than the value of their home. Upon noticing there was no value left in their home, many homeowners decided to stop paying their mortgages leading to banks foreclosing on those homes. The foreclosures drove home prices even lower and more home entered negative equity. 

 

What's going on now?

 

Once again, homeowners are seeing their home equity grow. It has been shown that over 48% of all single-family homes have over 50% equity. Families do tap into that equity, and this time with more responsibility. The amount of equity that is being cashed-out is a still a long ways away from what it was leading up to the 2008 housing crash. 

 

The recklessness that was apparent in 2008 is not playing a role today. Our housing market is much more secure today than the one we had a decade ago. 

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