After years of bruising inflation, Americans are carrying more debt than ever before. And more are using their homes to help them dig out.
Cash-out refinances, which let homeowners withdraw money from their homes when they refinance their mortgage, are on the rise, making up 59% of all refinancing transactions in the second quarter, according to ICE Mortgage Technology data. Paying off debt is among the most popular uses of the cash, with anywhere from 44% to 67% of refinancers in recent years saying they were doing so.
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Many mortgage lenders say they’re handling more of these refinancings as people struggle to stay afloat. Many of today’s homeowners are effectively rich in equity but low on cash. Balances on high-interest consumer debt like credit cards and auto loans are at record highs, but home equity levels are also higher than ever.
“Inflation is catching up to everybody,” said Matt Gouge, a Sacramento, Calif.-based loan originator at UMortgage. “More and more people are in that position where their cash flow is running negative, and you can’t do that forever. So you look at your home.”
As of the end of June, American consumers had a record $5.44 trillion in non-mortgage debt, according to New York Fed data, led by growth in credit card and auto loan balances. Homeowners, meanwhile, have record levels of equity after the dramatic run-up in home prices in recent years — $11.6 billion is considered tappable, meaning an owner could draw from that while maintaining at least 20% equity in their home, ICE Mortgage data shows.
For most borrowers, cashing out at today’s rates means giving up lower mortgage rates. It’s a sacrifice many are willing to make. About 70% of recent cash-out borrowers took on a higher mortgage rate in the process. On average, they added 1.45 percentage points to their rate in exchange for $94,000 in cash.
Many homeowners who held ultra-low rates still come out ahead by cashing out at today’s average rates of about 6.5%, depending on their circumstances. That’s because most consumer debt rates are far higher. Today’s credit card rates are about 21% on average. Personal loan rates are 12%, and auto loan rates start at around 8%.
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A homeowner carrying significant credit card debt can end up shaving hundreds off their monthly debt payments, even if their new mortgage rate and payment increase.
“I’m getting calls from people who are literally saying to me, ‘I can’t sleep at night with [this debt],’ that they’ve got to do something,” said Amy Sodowich, a New Jersey-based mortgage loan officer at Financial Resources Federal Credit Union.
