People looking to extract equity from their homes have increasingly been turning to cash-out refinancing, industry observers say.
A big reason that people are tapping their equity through refinancing comes down to dollars and cents, according to Amy Crews Cutts, deputy chief economist with Freddie Mac. Because home-equity loans and lines of credit are most often tied to the prime rate, now at 8.25%, those options have gotten more expensive even as long-term mortgage rates have remained relatively low, with the 30-year loan averaging about 6.2%.
Freddie Mac said 89% of the loans it owns that were refinanced in the third quarter of 2006 had loan amounts at least 5% higher than the original mortgage balances, the threshold for considering a loan a cash-out refinancing. It’s the highest share of cash-out refinance loans reported since 1990.
Consumers cashed out a total of $82.8 billion during the quarter, down somewhat from $90.6 billion in the second quarter, according to Freddie Mac.
Banks are seeing results of the cash-out trend, too.
“Banks have been reporting that they have not been getting the business of home-equity lines as they had been before,” Cutts said.
According to the American Bankers Association, the dollar amount of home-equity loans (including loans made through home-equity lines of credit) has increased by an annualized 14.6% for the first three quarters of 2006, compared with all of 2005. That’s down from a 17.4% increase in 2005 and a 31.2% increase in 2004.
Overall, borrowers also need to be honest with themselves before tapping their home equity, especially if the reason for the cash-out isn’t a one-time cost, said Jennifer Wheary, a senior fellow at Demos, a nonpartisan public policy research and advocacy organization. She recently completed a report on the issue of home-equity extraction.
“In the short-term, they will feel a sense of relief,” she said, referring to those who use the cash to catch up with such things as credit-card payments or medical expenses.
But the relief will be fleeting if they find themselves in the same situation — and this time without the cushion of home equity to fall back on, she said.