House-rich, cash-poor homeowners are tapping their record-high equity to cut their debts

Americans are facing unprecedented levels of debt, with non-mortgage debt reaching a record $5.44 trillion as of June. In response to this financial strain, many homeowners are turning to cash-out refinances as a way to alleviate their debt burden. Cash-out refinances allow homeowners to withdraw money from their homes when they refinance their mortgage, and they have become increasingly popular, making up 59% of all refinancing transactions in the second quarter.

One of the primary uses of the cash from these refinances is to pay off high-interest consumer debt, such as credit cards and auto loans. With interest rates on consumer debt at record highs, many homeowners are finding relief by tapping into their home equity, which is also at historic levels. According to ICE Mortgage data, homeowners have a total of $11.6 billion in tappable equity, meaning they could access that amount while still maintaining at least 20% equity in their home.

While cashing out at today’s rates may mean giving up lower mortgage rates, many borrowers are willing to make that trade-off in exchange for financial relief. On average, recent cash-out borrowers added 1.45 percentage points to their mortgage rate but received an average of $94,000 in cash. This trade-off can still be beneficial for homeowners, especially if they are carrying high-interest debt with rates much higher than today’s average mortgage rates.

For example, homeowners with credit card debt at an average rate of 21% can save hundreds of dollars each month by consolidating that debt into a cash-out refinance at a lower mortgage rate. This can provide much-needed relief for homeowners who are struggling to make ends meet.

Mortgage lenders are seeing an increase in cash-out refinances as more homeowners seek to leverage their home equity to reduce their debt burden. Homeowners like John Cola Jr. and his husband have successfully used cash-out refinances to pay off high-interest debt and lower their overall monthly payments. By tapping into their home equity, they were able to address unexpected expenses and improve their financial situation.

Overall, cash-out refinances offer homeowners a way to access their home equity and consolidate high-interest debt into a lower-rate mortgage. This can provide immediate relief from financial stress and help homeowners improve their overall financial health. As more Americans face mounting debt pressures, cash-out refinances are becoming a popular tool for achieving financial stability. Average HELOC and home equity loan rates are currently hovering in the 8% to 9% range, making them a popular choice for homeowners looking to tap into their home equity for various financial needs. While these rates are still lower than those of credit cards, they are higher than traditional first mortgage rates.

Financial experts advise caution when using a home for debt consolidation, as it can be a risky move if not done responsibly. While cashing out home equity can help lower monthly debt payments and free up cash, it is crucial for borrowers to address the root causes of their debt and create a plan to avoid falling back into the same situation in the future.

A recent study by the Consumer Financial Protection Bureau (CFPB) found that many homeowners who refinanced their mortgages to pay off debt saw their credit card balances increase again within a year of the refinance, although they remained below pre-refinance levels. This highlights the importance of addressing the underlying issues that led to the debt in the first place.

Rich Flanery, a broker-owner and financial planner at Peak Capital Mortgage in Estes Park, Colo., has witnessed cases where homeowners used their homes to pay off debt only to find themselves in a similar situation a few years later. He emphasizes the need for homeowners to consider their long-term financial goals and assess whether tapping into their home equity will truly help them achieve those goals.

Flanery warns against using a home as an ATM and falling into a cycle of debt that is difficult to break. It is essential for homeowners to be mindful of their spending habits and to seek professional advice before making any major financial decisions involving their home equity.

In conclusion, while HELOC and home equity loan rates may be attractive, it is important for homeowners to approach them with caution and careful consideration. By addressing the root causes of debt and creating a solid financial plan, homeowners can make the most of their home equity without putting their financial stability at risk.