A Consumer Financial Protection Bureau report found a link between homeowners taking out a cash-out refinance and an improvement in their overall financial health.
Per the watchdog’s report, which looked at borrower data between 2014 and 2021, consumers usually had higher credit scores following this type of refinance.
Homeowners usually used the tapped equity to pay down other outstanding debts, particularly credit card and auto loan debt.
The bureau’s analysis of consumer data found that paying off other debts was the main driver of homeowners choosing a cash-out refinance, with more than 40% of borrowers in 2020 and 2021 citing it. Home repairs were the second-most common reason.
Following a cash-out refinance, borrowers had large drops in credit card and auto loan balances, though this did not occur with student loan balances. Overall, the dip in credit card and auto balances caused sharp increases in consumer credit scores.
Following the refi, credit balances trended back towards pre-refinance levels, but did not exceed them. Concurrently, credit scores decreased in the year following the refi, but remained higher than they were previously.
Despite the findings, the CFPB did warn that paying non-mortgage debts with mortgage debt can increase the risk of foreclosure if payments become unsustainable.
The report also noted that borrowers may face barriers to accessing their home equity. One such barrier is that a cash-out refinance can be costly.
CFPB’s report found that homeowners frequently use cash-out funds to pay the closing costs of the new mortgage, which includes having to cover origination fees, appraisal fees, title insurance, and other taxes and fees to complete the mortgage transaction.
Last year, cash-out refinances were a bright spot during a time of muted origination activity.
As a result, mortgage lenders, such as United Wholesale Mortgage and Better, have jumped on the opportunity to roll out products to match demand.
