Home Credit score Mortgage buybacks are back: here’s why it’s not like last time

Mortgage buybacks are back: here’s why it’s not like last time


Using the house as a piggy bank is back in fashion. US homeowners pulled equity from their homes through third-quarter cash refinances at the highest rate in over 14 years.

Borrowers tapped $ 70 billion in home equity in the summer of 2021, mortgage data firm Black Knight said in a report on Monday. This is the highest quarterly count since 2007, when the housing bubble was about to burst.

Americans withdrew huge amounts of equity from their homes during this boom, leaving them vulnerable to foreclosure when the housing market collapsed. But there are many reasons why this real estate boom is different from the last.

The owners take a little money, not a lot

Over $ 70 billion in equity in just three months sounds like a lot. However, Black Knight says that amount was only 0.8% of available equity at the start of the quarter.

Compared to the last refi frenzy, today’s withdrawal activity is less than a third of the rate at which homeowners were withdrawing money from their homes back then, says Black Knight.

If the comparison is with homeowners who again use their homes as ATMs, this time they take $ 40 in cash quickly, not the maximum of $ 600.

Lenders no longer throw money at risky borrowers

The typical credit score for mortgage borrowers was 781 in the third quarter, up from 786 in the second quarter and just off the first quarter record of 788, the Federal Reserve Bank of New York said in a quarterly report. In the days of loose lending that led to the Great Recession, by contrast, the median credit score for mortgage borrowers fell to 707.

Meanwhile, only a quarter of borrowers who obtained home loans during the summer months had credit scores below 729. According to data from the New York Fed, only 10% had credit scores below. 677.

Loan-to-value ratios are of little concern

Home values ​​are absolutely on fire. They climbed 18% from the third quarter of 2020 to the third quarter of 2021, according to the Federal Housing Finance Agency.

This means that homeowners can harness equity without going into too much debt. A borrower’s average mortgage debt is now just 45.2% of their home’s value – the lowest total market leverage on record, dating back to at least the turn of the century, according to Black Knight.

Why you should dip into equity – and why you shouldn’t

Thinking of jumping on the wave of cash-out refi? Here is a breakdown of the reasons for withdrawing money from your home, along with some tips on the financial relevance of that justification:

Home improvements and repairs: Green light.

Home improvements are likely to last for years, a period that fits the mortgage debt horizon. Kitchen renovations and bathroom updates are a no-brainer.

But non-essential projects, like a swimming pool or game room, won’t necessarily reward you with a corresponding increase in property value. However, if you need a new air conditioner or an updated electrical system, a mortgage is the cheapest money you’ll find.

Consolidation debt: Yellow light.

If you have credit card debt and are paying double-digit interest rates, it might make sense to swap expensive revolving debt for historically cheap mortgage debt. With this strategy comes an important caveat, however: Withdraw money from your home to pay off credit cards only if you are not simply going to increase your credit card debt.

“Using home equity to do debt consolidation really depends on whether the root cause of the debt has been addressed,” says Greg McBride, chief financial analyst at Bankrate. “An overspending pattern could lead to credit card debt remaking, in addition to now also carrying debt to home equity.”

Homeowners who use their home equity as a lifeline can dig a deeper hole in the long run. If you continue your withdrawal refi with more spending, you’ll face another debt crisis, but this time with less equity cushion to cushion the fall.

Investment: Yellow light.

As with using a home’s equity to pay off debt, the math around investing is nuanced. If you want to tap cheap mortgage money to fatten up your retirement savings and put that product into a well-diversified portfolio, finance professionals give their blessing. There is a strong case for using cheap mortgage money to consolidate your retirement account.

But if you’re aiming to mine equity for the stocks of the day or play the cryptocurrency boom, the right advice is to think again. Such a bet could pay off, or you could lose big.

Student loan repayment: yellow light.

This one is a bit of a gray area. If you owe student loans to private lenders, it may be a good idea to repay them using the equity in your home. Unlike federal loans, private student loans have higher rates and less flexibility.

On the flip side, if you have federal loans, you don’t have to rush to pay them off, says McBride. Their reasonable interest rates and income-based repayment plans mean federal student loans may not be a crippling form of debt.

Going on vacation or buying consumer goods: Red light.

Think of it this way: Your mortgage term is 15 or 30 years because real estate is a long-term asset that will give you years of use and almost certainly grow in value. A Caribbean cruise or a game console, on the other hand, will be long forgotten even if you pay for it for decades. If a withdrawal refusal is your only option to pay for a vacation or other expensive item, it’s best to put the purchase on hold.

Dealing with household bills: Red light.

Borrowing for 30 years to pay for child care, groceries and car repairs this month is not a sustainable way of life. If this is your case, look for ways to increase your income or tighten your budget.

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