During the 2020 refinancing boom, American homeowners increased withdrawal refinances to the highest levels since the easy money frenzy 15 years ago.
This trend may seem threatening, but it comes with an important caveat: unlike last time, Americans are leaving a lot in the piggy bank.
The typical homeowner who took advantage of the home’s value last year withdrew just enough money to cover the closing costs of his refinances, according to New Research from the Federal Reserve Bank of New York.
First, the big picture: homeowners withdrew $ 188 billion in shares during 2020, the highest level of withdrawals since the busy years leading up to the Great Recession. However, overall figures remain well below the withdrawal volumes seen in that sparkling era.
In addition, the average value obtained through withdrawal refinancing has dropped from 2019 to 2020, reports the New York Fed. Borrowers who drew in 2019 withdrew an average of $ 49,000 in home equity. In 2020, that level dropped to $ 27,000. And most owners withdrew less than $ 7,000.
“The average withdrawal in 2020 was just $ 6,700, suggesting that at least half of refinancers borrowed only enough additional funds to cover the closing costs of the new mortgage,” wrote the New York Fed researchers.
Memories of the last housing boom remain
A withdrawal refinance replaces your existing home loan with a new mortgage that is larger than the balance you owe.
Withdrawal refills have advantages and disadvantages. The loans allow homeowners to use part of the money held in their homes and use the proceeds to finance home improvements or pay off credit cards.
The appeal is obvious: mortgages are the cheapest form of debt available to many Americans. Mortgage rates were in the 3 percent range, well below double-digit rates on credit card balances.
Used very liberally, however, the withdrawal becomes dangerous. They can overwhelm consumers with new debt and higher payments that can become paralyzing in a recession.
Borrowers and bankers learned this lesson in the Great Recession. Homeowners who removed shares from their homes during the bubble were more likely to default when house prices plummeted.
During the latest cash withdrawal boom, homeowners and creditors were much more cautious. During the first months of the pandemic, creditors withdrew on the withdrawal refills. When it became clear that COVID-19 was creating a housing boom instead of a crisis, creditors resumed drawing withdrawals – although they limit borrowers to loans of 70% to 80% of the value of their homes.
Even with creditors allowing borrowers to withdraw money from their homes again, many consumers seem to remember the disadvantage of taking on additional debts against their homes.
“Most of the borrowers who were able to qualify were concerned about taking on more debt,” said Rocke Andrews of Lending Arizona in Tucson. “Small business owners who needed money had a hard time qualifying.”
Record-breaking credit score
Today’s strict credit standards illustrate another contrast between the coronavirus housing boom and the 2005 to 2007 housing bubble: most mortgage borrowers have impeccable credit.
The typical credit score for mortgage borrowers in the fourth quarter of last year was nearly perfect 786, corresponding to a record set in the third quarter, according to the New York Fed.
This is the highest level in at least two decades. During the era of loose loans that led to the Great Recession, the average credit score of mortgage borrowers dropped to just 707.
Meanwhile, only a quarter of borrowers who took out home loans during the period from October to December had credit scores below 737. And only 10% had credit scores below 687, according to New York Fed data.