Americans Are Taking Cash Out of Their Homes—And It Is Costing Them

Andy Jaconsohn for The Wall Street Journal

Many U.S. homeowners who need cash are taking it out of their properties. The trade-off: higher interest rates.

Over the past two years, a big chunk of homeowners took on higher interest rates when they refinanced to tap their home equity. These cash-out refinancings, as they are known, free up money homeowners can use to pay down credit-card debt, renovate or invest in a new property.

Nearly 60% of cash-out refinancings in 2018 came with higher interest rates, the biggest share since before the financial crisis, according to Black Knight Inc., a mortgage-data and technology firm. This year, that number fell to around 44% of cash-out deals, but it remains at more than three times its average between 2009 and 2017.

This corner of the mortgage market illuminates the crosscurrents in the U.S. economy: After roughly a decade of rising home prices, homeowners are flush with record amounts of home equity they can tap. But many Americans remain short on cash and are increasingly relying on debt to fund their lives.

“There’s something in their life that is causing them to need money,” said Sam Polland, a mortgage-loan officer at Sandy Spring Bank in Rockville, Md. “They are willing to go up in rate to get the equity out of their house.”

For some homeowners, the trade-off is worth it. While mortgage rates have crept up, they are still lower than what borrowers would pay if they tapped a credit-card or home-equity line of credit.

Cash-out refis made up a significant share of refinancings in the third quarter, helping fuel a rebound in the mortgage market after a dismal 2018. Led by refis, lenders originated $700 billion in mortgages in the third quarter, the most since before the financial crisis, according to industry research group Inside Mortgage Finance.

The average 30-year fixed mortgage rate has been under 4% for much of the year. That is low by historical standards, but higher than periods in 2012, 2013, 2015 and 2016 when borrowers last flooded the market. Black Knight found that 39% of the people who did cash-out refis in the third quarter had obtained their mortgages during those four low-rate years.

Paul Thompson, who works in product development, got a mortgage at 4% when he bought his Dallas house in 2015. This month, he refinanced at 4.625% and took out about $30,000.

The higher rate was worth it, he said, because it gave him the cash to renovate an investment property next door that he bought this fall. His parents are planning to move in once it is finished.

“It just gives me some cushion should I have to go back to being self-employed,” said Mr. Thompson.

Paul Thompson, at top, refinanced his Dallas home at a higher rate. He says it was worth it, because it allowed him to tap about $30,000 to renovate an investment property next door.

Andy Jaconsohn for The Wall Street Journal

Summer Garrett, Mr. Thompson’s loan officer at Caliber Home Loans Inc., said cash-out deals made up about 30% of her business over the past few months. Many clients use them to pay off credit-card debt, she said.

The use of cash-out refinancings worries some economists because it echoes the precrisis era, when homeowners used their homes like ATMs. Consumers who struggle to pay mortgages that have swelled due to a cash-out refinancing risk losing their homes. Credit-card debt, by contrast, is unsecured.

But the volume of cash-out refinancings remains well below precrisis levels. And many lenders say this type of activity isn’t uncommon deep in an economic expansion marked by rapid home-price growth in much of the country.

Cash-out refinancings also look increasingly attractive next to home-equity lines of credit. The 30-year fixed mortgage rate has fallen at a much faster pace than Heloc rates this year because they are based on different benchmark rates that haven’t moved in tandem.

In September, the average 30-year mortgage rate was almost 3 percentage points lower than the average Heloc rate, the biggest gap on record going back to 1992, according to personal-finance website Bankrate.com.

Homeowners sometimes lower their rates through cash-out deals.

Matthew Miller traded in an adjustable-rate mortgage at 4.75% for a 30-year fixed-rate loan at 3.5% this fall.

The New York-based architect took out the ARM last year to finance the purchase of a home in Sagaponack, N.Y. Because the house wasn’t up to code, he had trouble finding a lender and accepted a rate higher than the market rate as a result.

He renovated the property to bring it up to code, allowing him to refinance into a fixed-rate mortgage. The renovation also increased his equity; he pulled out $350,000 through a cash-out refinancing to cover the construction costs.

“It was a stressful process, definitely,” he said. “But now that it’s done it feels really good.”

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