Cash-out mortgage refis are back — will homes become ATMs again?

As interest rates rise, fewer households refinance their mortgages. And the refinances that do get done are often very different than those initiated during low-rate periods.

“When rates are low, the primary goal of refinancing is to reduce the monthly payment,” wrote researchers for the Urban Institute in a recent report. “But when rates are high, borrowers have no incentive to refinance for rate reasons. Those who still refinance tend to be driven more by their desire to cash out.”

“Cashing out” is shorthand for taking out a new mortgage that’s bigger than the remaining balance on the old one and using the money that makes up the difference for discretionary purchases.

As of the fourth quarter of last year, the share of all refinances that were cash-outs rose to the highest since 2008, according to Freddie Mac data. Rates have churned higher since the presidential election in late 2016, though they spent much of 2017 reversing the immediate post-election surge.

It’s not clear whether the overall volume of cash-out refinances is rising. Right now they’re making up a bigger share of the pie because traditional lower-monthly-payment refis are plunging.

Read: Refinancings haven’t been so scarce since Lehman Brothers imploded

Tapping into home equity is often a good way for owners to consolidate or manage other, more expensive, forms of debt like high-interest credit cards or bills for higher education.

“As people stay in their homes longer we see people reinvesting in their homes by using equity to update their homes and do repair work,” said Rick Sharga, executive vice president for Carrington Mortgage Holdings and an industry veteran.

That’s especially true for older Americans, he added. “We’ve seen a huge expansion of the types of retirement options people have. One is aging in place and retrofitting your house.”

Read: What’s driving latest wave of home remodeling? Hint: These baby boomers

The challenge will be making sure that the new wave of equity cash-outs isn’t like the one that helped torpedo the financial system a decade ago. (The Urban Institute and others have shown that refinancing activity, not home buying, was responsible for inflating the housing bubble.)

In the last go-around, many homeowners “blew the money,” in Sharga’s words, on splashy purchases like vacations and boats. But lenders were complicit too, offering loans that were as much as 120% of the existing value of the home.

In the wake of the crisis, lenders and consumers alike are much more aware that home prices can also go down, Sharga noted.

He also expects to see more cash-out refis as homeowners shift away from home-equity loans and lines of credit, which no longer carry the same tax deductibility they once did.

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