During the 2020 refinancing boom, US homeowners accelerated cash flow refinancing at their highest level since the easy money frenzy of 15 years ago.
This trend may sound worrisome, but it comes with an important caveat: Unlike last time, Americans are leaving a lot in the piggy bank.
The typical homeowner who tapped his home equity last year withdrew just enough money to cover the closing costs of his refinances, according to new research from the Federal Reserve Bank of New York.
First, the big picture: Homeowners withdrew $ 188 billion in home equity in 2020, the highest level of withdrawals since the boom years before the Great Recession. However, the overall amounts remain well below the withdrawal volumes observed in this frothy time.
In addition, the average amount taken on cash-out refinances decreased from 2019 to 2020, reports the New York Fed. Borrowers who cashed in in 2019 took an average of $ 49,000 from their home equity. In 2020, that level fell to $ 27,000. And most of the owners took out less than $ 7,000.
“The median withdrawal of withdrawals in 2020 was only $ 6,700, suggesting that at least half of refinancers only borrowed enough additional funds to cover the costs of closing the new mortgage,” write New York Fed researchers.
Memories of the last real estate boom persist
A cash refinance replaces your existing home loan with a new mortgage that is higher than the balance you owe.
Refis of withdrawal have advantages and disadvantages. Loans allow homeowners to mine some of the money trapped in their home and use the proceeds to finance home improvements or pay off credit cards.
The appeal is obvious: Mortgages are the cheapest form of debt available to many Americans. Mortgage rates hovered around 3 percent, well below double-digit rates on credit card balances.
Used too liberally, however, rewinds become dangerous. They can burden consumers with new debt and higher payments that can become crippling during a downturn.
Borrowers and bankers learned this lesson during the Great Recession. Homeowners who took equity out of their homes during the bubble were more likely to default when home prices fell.
During the latest refi cash-out boom, homeowners and lenders were much more cautious. In the first few months of the pandemic, lenders withdrew the refis of withdrawals. When it became clear that COVID-19 was creating a real estate boom rather than a collapse, lenders resumed withdrawal refusals – although they limited borrowers to loan amounts of 70-80% of the value of their house.
Even though lenders allow borrowers to withdraw money from their home again, many consumers seem to remember the downsides of taking on additional debt against their home.
“Most of the borrowers who were able to qualify were worried about taking on more debt,” says Rocke Andrews of Lending Arizona in Tucson. “Small business owners who needed the cash struggled to qualify. “
Credit scores hit record highs
Today’s stringent lending standards illustrate another contrast between the coronavirus housing boom and the housing bubble of 2005-2007: Most mortgage borrowers have impeccable credit.
The typical credit score for mortgage borrowers in the fourth quarter of last year was near perfect at 786, matching a record set in the third quarter, according to the New York Fed.
This is the highest level for at least two decades. In the days of the floating loans that led to the Great Recession, the median credit score for mortgage borrowers fell to 707.
Meanwhile, only a quarter of borrowers who obtained home loans from October through December had credit scores below 737. And only 10% had credit scores below 687, according to data from the New Fed. York.