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More Homeowners Are Taking Cash-Out Refinances Now. What Does That Mean?

January 31st, 2019 9:29 AM by Eric A. Willner, RFC, LUTCF, CSA

Radio Show Notes 1/31/19 Thursday:

More Homeowners Are Taking Cash-Out Refinances Now. What Does That Mean?

The Real Estate Show investigates why More Homeowners Are Taking Cash-Out Refinances Now. Why? And What Does That Mean? As the access to mortgages becomes easier and the guidelines become more within reach for more people, interest rates, on the other hand, have been edging up over the last year. Furthermore, experts predict another increase in interest-rate sometimeIn the spring. All that notwithstanding, some homeowners are still trading in their old mortgage rate for a new one in order to access their equity into cash. Let’s take a further look.

But first, let’s first understand a few things about mortgages. On a macro level, there are two main areas of residential mortgage financing: Purchase Mortgages and Refinance Mortgages. They each have their own guidelines and criteria. For today’s episode, we are going to focus on refinance mortgages. And within the refinance world, there are two main categories: rate and term refinance it and cash out refinances. They also each have different parameters and guidelines. On the show, I broke out more details about each. My focus today will be on some interesting revelations about a surge in cash out refinances.

Let’s get to the News:

Even though overall refinance activity is down, cash out refi‘s are up in all types of mortgages. The trend is even more apparent among government backed loans. When it comes to government backed loans offered by FHA (Federal Housing Administration) and the VA (Department of Veteran Affairs), 76% of all loans were cash outs. This is the highest percentage in the 20 years that this data has been collected, according to Corelogic.

The number of cash out refinance is in 2018 was more than double the number in 2014. Nevertheless, this still pales in comparison to 2008, just when the bubble was bursting, which saw just under 200,000 government backed refinance cash-outs.

Even FHA recently revealed that the agencies cash out activity rose to 35% of total refinance volume in 2018, compared to only 23% the year before.

Ginnie Mae, which backs VA loans, is also wrestling with a wave of cash out refinances. Cash out refinances comprised 86% of all VA refinancing activity in September 2018, up from 30% to years prior, according to Bloomberg.

Non government, conventional lending is seeing a surge in cash out refinance activity as well, even though total refinance activity is relatively low.

Once again, Corelogic data shows that conventional cash out refinances comprised 56% of all refinances in 2018, up 10% from the previous year. This comes close to 2006’s high of 63%.

What does this mean?

The bottom line is that homeowners know their homes are appreciating. Now, they are looking to make use of that equity in other ways. Some may use this to invest and buy more real estate, more often, homeowners are using it to improve their current property rather than fight a rising market where prices are outpacing incomes. And still others may use that to consolidate debt and shore up their finances. The reasons are many, but the clear trend is clear. Homeowners are looking for their equity in cash, And they are opting for the easier guidelines of government backed loans to get it.

According to CoreLogic’s Deputy Chief Economist Ralph McLaughlin, “It reflects fundamentally a change in the type of cash out refi borrower. We went from a borrower who was your classic 20% borrower, with two steady income is in a household that saw a decent home price appreciation, toone who also saw some home price appreciation, but maybe, for whatever reason, doesn’t have the best credit score out there or maybe service in the military and is looking to tap out some of that equity, but wasn’t able to do so using conventional financing“.

McLaughlin went on to say that an uptick in cash out refinance is does present increased risks to the agencies that back these loans, but he doesn’t think it’s too concerning yet. He said that given the number of overall cash out refinancing in the marketplace is a relatively low, that suggest to him that it’s probably not a problem Mattick risk, even though it’s higher than it was the last several years. He also said that he expected that this upward trend of cash out refinance activity for low to middle income homeowners will continue into 2019.

If you are serious about real estate and what to be better informed, then find out more on today and everyday’s episodes and learn more about Real Estate Investing and learn HOW TO by listening to The Real Estate Show with Eric Willner , Live every weekday morning at 8 o’clock (EST) on Florida’s Money Talk Radio station WSBR AM740, FM 96.9, and FM 103.9. You can also hear us on the free apps: iHeart Radio and TuneIn. Recorded Rebroadcasts are available 24/7 on Facebook. Please share our Facebook updates.

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Posted by Eric A. Willner, RFC, LUTCF, CSA on January 31st, 2019 9:29 AM