The name itself conjures up images of ATMs: cash-outs.
You may associate the term “cash-out refinancing” with the frothy and dangerous days of the real estate boom, when some owners turned their hyperinflating houses into money mills, leveraging their equities to the hilt. That didn’t end up too well for many of them.
But now that equity holdings in homes are surging again, cash-out refinancings are coming back into vogue – this time under much tighter controls by lenders and used for saner purposes by borrowers than they were last decade.
Giant mortgage lender Quicken Loans estimates that about one-quarter of new refinancings are cash-outs. Federally chartered investor Freddie Mac reports that cash-outs grew to 17 percent of all refinancings in the first quarter of this year compared with 14 percent the same period in 2013.
A cash-out refi means that the homeowner extracts more money in a replacement mortgage than the current balance, rather than simply lowering the rate and keeping the principal amount the same as it was before the transaction.
Say you have an existing loan with a $200,000 balance. Thanks to rising home values, your property is worth $400,000. If you have a need for cash and good to excellent credit scores, you might be able to negotiate a refinancing into a $250,000 or $300,000 new fixed-rate mortgage. Putting aside transaction costs, you’d end up with roughly $50,000 to $100,000 in cash at closing for whatever use you have in mind.
During the height of the boom years, according to Freddie Mac data, in 80 percent or more of all refinancings borrowers opted to pull out some cash. Freddie defines a cash-out refi as one where there is an increase in the principal balance of at least 5 percent over the previous balance. In the wake of the bust and recession, when owners in this country lost close to $6 trillion in equity, cash-outs have been far fewer and tougher to obtain.
Even this spring they’re just a fraction of total refinancing volume, but the purposes that borrowers plan for the cash they’re extracting have changed dramatically. Whereas a decade ago people were pulling out extra money to pay for consumer spending – cars, boats, vacations – bankers say today they’re focused on more financially sound uses.
Bob Walters, chief economist for Detroit-based Quicken Loans, says his firm is seeing “a lot of debt consolidation” using cash-out refinancings. The same is true at Insignia Bank in Sarasota, Fla. CEO and Chairman Charles Brown III says “sophisticated” borrowers concerned about rising interest rates are consolidating high-cost credit card, mortgage and other floating-rate debt into fixed-rate home loans. The replacement mortgages often carry 30-year rates anywhere from the low 4 percent range to just below 5 percent, depending upon the borrowers’ credit and income profiles.