Homeowners Cash Out at a Rapid Rate
Homeowners Take Advantage of Rising Home Values
Homeowners are capitalizing on the booming real estate market, drawing down on the equity in their homes at a pace not seen since the middle of 2007. In the second quarter of the year, homeowners took $63 billion in equity out of their houses via cash-out refinances. In the last year, about one in five US homeowners withdrew money from their homes.
Homeowners are cashing out on their properties for a variety of reasons. Getting funds for home improvements is one main motivator. Other homeowners are using money to pay down debt or to pursue investment opportunities. Surging home prices over the last year and a half and low interest rates are making it worthwhile for many homeowners to refinance.
Economists See This as Different From Past Real Estate Booms
During the last real estate boom, home equity loans were a popular option as homeowners rushed to cash out on their rising property values. Houses became ATMs for some homeowners who used home equity lines of credit to bankroll vacations and cars. When home prices crashed, their equity disappeared. Many homeowners struggled to pay the money back.
Economists are not too concerned about the same scenario playing out this time. Equity withdrawals are much lower than during the previous boom and bust and home values are much higher. Meanwhile, revolving lines of credit which have variable interest rates have been declining. Economists say that indicates homeowners are using equity for a specific reason instead of to boost their spending budgets.
Homeowners Weigh Risks
Accessing money from a home makes sense when prices are appreciating. However, it’s not completely risk-free. By drawing money out of a home, homeowners are adding to the debt on their property and reducing the equity available to tap. If home prices decline, the homeowner could end up owing more than the property is worth. Another risk is that the cash-out refinance could leave the homeowner with a loan-to-value ratio which makes it difficult to refinance in the future.
It is understandable that homeowners want to tap equity in their homes given the rapid appreciation in the past 18 months. However, homeowners have to weigh the risks against the benefits when considering a cash-out refinance.
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