Freddie Mac recently released their Quarterly Refinance Statistics report which covers refinances through 2020. The report explains that the dollar amount of cash-out refinances was greater in 2020 than in recent years. A cash-out refinance, as defined by Investopia, is:
“a mortgage refinancing option in which an old mortgage is replaced for a new one with a larger amount than owed on the previously existing loan, helping borrowers use their home mortgage to get some cash.â€
The Freddie Mac report led to articles like the one published by The Real Deal titled, House or ATM? Cash-Out Refinances Spiked in 2020, which reports:
“Americans treated their homes like ATMs last year, withdrawing $152.7 billion amid a cash-out refinancing spree not seen since before the 2008 financial crisis.â€
Whenever you combine the terms “spiked,†“homes like ATMs,†and “financial crisis,†it conjures up memories of the housing crash we experienced in 2008.
However, that comparison is invalid for three reasons:
Mortgage data giant Black Knight just issued information on the amount of tappable equity U.S. homeowners with a mortgage have. Tappable equity is the amount of equity available for homeowners to use and still have 20% equity in their home. Here’s a graph showing the findings from their report:
In 2006, directly before the crash, tappable home equity in the U.S. topped out at $4.6 trillion. Today, that number is $7.3 trillion.
As Black Knight explains:
“At year’s end, some 46 million homeowners held a total $7.3 trillion in tappable equity, the largest amount ever recorded…That’s an increase of more than $1.1 trillion (+18%) since the end of 2019, the largest percentage gain since 2013 and – you guessed it – the largest dollar value gain in history, to boot. All in all, it works out to roughly $158,000 on average per homeowner with tappable equity, up nearly $19,000 from the end of 2019.â€
In 2006, Americans cashed-out a total of $321 billion. In 2020, that number was less than half, totaling $153 billion. The $321 billion made up 7% of the total tappable equity in the country in 2006. On the other hand, the $153 billion made up only 2% of the total tappable equity last year.
Freddie Mac reports that 89% of refinances in 2006 were cash-out refinances. Last year, that number was less than half at 33%. As a percentage of those who refinanced, many more Americans lowered their equity position fifteen years ago as compared to last year.
It’s true that many Americans liquidated a portion of the equity in their homes last year for various reasons. However, less than half of them tapped their equity compared to 2006, and they cashed-out less than one-third of that available equity. Today’s cash-out refinance situation bears no resemblance to the situation that preceded the housing crash.
