Mortgage refinancing is sizzling, however utilizing your own home as an ATM shouldn’t be

Mortgage refinancing is hot, but using your home as an ATM is not

Mortgage rates have been near record lows since the coronavirus pandemic began, and while millions of Americans have already refinanced their home loans this year, very few of them have paid out cash.

Mortgage technology and data provider Black Knight, cashout trades accounted for only 27% of all mortgage refinances in the third quarter of this year. That is the lowest percentage in seven years.

Those who take money out of their homes are taking out less than in the past. The average amount fell to $ 51,600 from $ 63,000 in the previous quarter. Total equity withdrawn in the quarter decreased to $ 37 billion, the lowest equity withdrawal since Q2 2019.

This is as real estate values ​​soar and the number of home borrowers soars to record levels. Just over a quarter of all US mortgage holders are considered “equity rich” and have at least 50% equity in their homes, according to Attom Data Solutions.

“Of course, consumers’ memories of the Great Recession were likely resurrected by the recent pandemic economic hardship. As a result, they may be less willing to tap into what they may see as an emergency source of capital,” said Andrew Walden, economist and director of market research at Black Knight.

Walden notes that the current surge in refinancing is due to the sharp decline in mortgage rates. As a result, most borrowers are only looking for savings, not necessarily money to spend.

More from Invest in You:
How to borrow money when you run out of options
What you need to know before taking out a home loan or borrowing from your 401 (k)
The “predictably irrational” author says this is what investors should be doing during the pandemic

Today’s borrowers certainly remember the last real estate boom in the early 2000s when homeowners used their properties like ATMs. When the market crashed in 2007 and house prices plummeted, millions of borrowers were left “under water,” more due to their mortgages than their homes were worth. That sparked an epic foreclosure crisis.

“That event has since changed the perspective of many homeowners to see home equity as a nest egg rather than a bank account,” said Matthew Weaver, vice president of CrossCountry Mortgage in Boca Raton, Florida.

However, Weaver warns that holding onto excess home equity is not always the safest financial decision.

“On the surface it seems like a more responsible and sensible position, and in some cases it is also negative when the pendulum swings too far,” said Weaver. “Credit card debt is at an all-time high. Many with equity in their homes who can (and should) use that equity at a lower fixed rate are choosing not to.”

The pandemic has also sparked a leap in home remodeling as people adapt to work and school from home. It is therefore surprising that more people are not taking out money to pay for it.

“This is a situation where the low fixed-rate mortgage available through withdrawal refinancing is typically cheaper than home improvement financing,” added Weaver.

While some use home equity, Justin Sullivan, president of Impact Construction in Washington, DC, said he doesn’t see it as often as usual.

“We hear that the money people save by not eating out, not eating out, not going on vacation, these things are saved and they choose to bring that value back into their homes as an investment.” he said.

SIGN IN: Money 101 is an 8-week financial freedom learning course delivered to your inbox weekly.

CHECK OUT: I have 9 sideline jobs and bring in up to $ 4,000 every month: here’s my best advice about Grow with acorns + CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.