Prior to the meltdown in 2006, almost 90% of all refi’s were “cash out,” meaning that borrowers increased the size of their loan with their refi. Borrowers effectively used their homes as ATMs, and used the cash from their refi’s to buy expensive cars, time-shares, vacations, boats and other luxury goods.
Heejin and I bore witness to it all, and were often shocked and amazed by the brazenness of the spending. I remember one borrower in particular obtaining a 90% loan-to-value, stated income loan with WAMU in order to pay off her brand new ski boat and SUV (she “needed” to tow the boat).
After the meltdown, cash out refi’s fell to a low of about 10% of all refi’s. More recently, according to an article in the WSJ, that percentage has climbed back up to about 50% as a result of low rates and appreciating home values.
BUT – this time, there is no cause for alarm for a few reasons. First and foremost, both appraisal and income verification guidelines are far tighter than they were in 2006. Secondly, people are using their cash for sounder financial reasons, as opposed to padding their lifestyle.
With rates so low it often makes financial sense to pull cash out of your home to consolidate consumer debt, to pay tuition (instead of taking on student loans), or to do home (capital) improvements.
We also see borrowers use cash out for down payments on additional real estate purchases – something that Realtors should remember when they contact their database of past buyers.
Founder/Broker | JVM Lending
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