Borrower's raising mortgages to get cash out

Borrower's raising mortgages to get cash out

For several months now, cash-out refinances have been eating up a greater share of overall refi volume, and it appears the trend isn’t about to slow down anytime soon.

The latest report from Black Knight reveals that of the 483,000 refinances originated in the fourth quarter of 2018, 82% were cash-outs – the largest share since it peaked at 84% in 2006.

But while this trend that may seem alarming on its face, Black Knight points out that while cash-outs now comprise the vast majority of refis, the overall number of cash-outs is down from recent years.

Just 1.7. million cash-outs were originated in 2018, the report reveals, and this is the lowest number since 2015.

Moreover, the data shows that in two-thirds of the cash-out transactions in Q4, the borrower raised their mortgage rate in order to access their equity in cash. This is the largest share ever recorded, Black Knight reports, noting that rising short-term rates are to blame.

“This is due not only to overall rising rates, but also to the fact that rising short-term rates are prompting borrowers with low 30-year first lien rates to accept a rate increase rather than take on a HELOC at a considerably higher interest rate,” the report states.

The average cash-out amount was $70,300 in Q4. This number has been steadily increasing alongside a rise in tappable home equity, Black Knight points out. In 2017, the average was $67,800.

Also, while the loan-to-value ratio for cash-outs remains low at 67%, credit scores are declining, reaching an average of 732 in Q4, the lowest in 10 years.

Will cash-outs continue to reign supreme?

Black Knight says softening rates in early 2019 may heat up cash-out action, but rate-and-term refinances might also rise, nudging down cash-outs in share of refi volume.

“Heading into Q2 2019, the 30-year fixed rate stands at 4.3%,” said Ben Graboske, president of Black Knight’s Data & Analytics division. “The last time rates were at this level, cash-out withdrawals as a share of available equity were more than 25% above where they were in Q4 2018, suggesting we could see a noticeable rebound in homeowners tapping available equity via cash-out refis in coming months given the increased rate incentive to do so.”