Homeowners Are Now Cashing-In When Refinancing, Rather Than Cashing-Out
Posted on February 4, 2013
For the better part of the past two decades, and even more so in the current decade, homeowners have opted to cash-out when they refinanced their mortgages. It was the basic principle of piling on more debt because, in general, the idea was that the real estate market was strong and that their home values could only increase. Currently, however, homeowners seem to have learned a valuable lesson of the housing crash and are deciding, when refinancing, to cash-in rather than drawing on the money freed up with the refinance.
The general concept in America for the past two decades has been to accumulate more debt, whether it was through credit or home loans, assuming that the value of their home would continue to increase, which it had through most of that period. Now the concept of saving is taking precedent.
Cash-outs reached their peak during the last decade, culminating in 2006 in which the rate of cash-outs hit 88 percent of home refinances. Taken into context, that number is nearly nine out of every ten homeowners who refinanced. These figures come from Freddie Mac, the mortgage giant that monitors refinances on a quarterly basis. When these homeowners cashed-out, they increased their mortgage balance by at least 5 percent, on average.
Then we all know what happened next. Between 2005 and 2009, the American homeowners lost more than $7 trillion in equity, according to Federal Reserve estimates. This evaporation of wealth was unprecedented and few populations or locations were spared. This has led to a shift in the psychological makeup of the average homeowner who is now looking for ways to reduce their debt burden. Last quarter, according to Freddie Mac, 33 percent of homeowners actually put cash into their refinancing loans to decrease their mortgage balances as well as aim for lower interest rates.
A great advantage to cashing-in on refinancing is that for homeowners who, for example, have a LTV (loan-to-value) ratio of 80%, will have to pay private mortgage insurance premiums and may also be subject to higher interest rates. Cashing-in and paying down the LTV to, let’s say 75%, the homeowner can avoid those costly private insurance premiums and also qualify for lower interest rates.
The rationalization for cashing-in on refinancing is simple and makes perfect sense, though it is not always clear to homeowners or mortgage brokers at the outset. First, with interest rates in the economy overall being as low as they are, money that is held in savings accounts are not earning much at all. Money market funds are not fairing all that much better, either. Paying down a home loan right now actually offers a better investment.
Cash-ins are, in essence, a more disciplined form of savings, though many homeowners still feel nervous about removing their liquid assets in a tight economy. Understandably with so much volatility in the economic and financial climate, with jobs still being shed and new ones being slow to evolve, tapping into a savings account may appear to be a risk on the surface. Yet the long-term savings by cashing-in on a refinance will far outweigh that of keeping it in a bank account.
What’s not clear yet about cash-ins is whether this is the beginning of a serious trend or merely a current plan of some homeowners to take advantage of sound financial advice. In 2007, cash-ins hit 9 percent of all refinances. By the final quarter of 2009, the number had jumped to more than 33 percent.
This trend may also be due to a tighter financial lending atmosphere, making it more difficult for homeowners to cash-out. It may also be a temporary, conservative approach until interest rates begin to climb once again. Whatever the case, if a homeowner has savings to tap into, then cashing-in may be a valuable, cost-saving option in the current mortgage and financial climate.
Written By: David Reinholtz
David is the Founder and CEO of LoanOfficerSchool.com, an approved education provider for The Conference of State Bank Supervisors and The National Mortgage Licensing Systems’ (NMLS) required pre-licensing education and continuing education.