Cash-out refinances have been consuming a greater share of overall refinance volume, and Black Knight’s new report revealed borrowers chose higher mortgage rates just to access their equity in cash.
In fact, 82% of the 483,000 refinances originated in Q4 2018 were cash-outs. It is the biggest share since it peaked at 84% in 2006. Rising short-term rates drove the rising share in cash-outs, according to Black Knight.
“This is due not only to overall rising rates but also to the fact that rising short-term rates are prompting borrowers with low 30-year first lien rates to accept a rate increase rather than take on a HELOC at a considerably higher interest rate,” the report said.
Black Knight said that while cash-outs now make up the vast majority of refis, the overall number of cash-outs dropped from recent years. Only 1.7 million cash-outs were originated last year, the lowest number since 2015.
The average cash-out amount was $70,300 in the fourth quarter. This number has been continuously climbing alongside a rise in tappable home equity. The average cash-out amount in 2017 was $67,800.
Additionally, the loan-to-value ratio for cash-outs stayed low at 67% while credit scores declined, averaging 732 in Q4, the lowest in a decade.
Black Knight forecasted that rates would soften in early 2019 and might heat up cash-out action. However, rate-and-term refinances might also increase and push down cash-outs in share of refi volume.
“Heading into Q2 2019, the 30-year fixed rate stands at 4.3%,” said Ben Graboske, president of Black Knight’s data and analytics division. “The last time rates were at this level, cash-out withdrawals as a share of available equity were more than 25% above where they were in Q4 2018, suggesting we could see a noticeable rebound in homeowners tapping available equity via cash-out refis in coming months given the increased rate incentive to do so.”