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.”
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.”
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
1. Americans are sitting on much more home equity today.
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
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.”
2. Homeowners cashed-out a much smaller amount this time.
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.
3. Fewer homeowners tapped their equity in 2020 than in
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.