Don't Take Out To Much Equity

Hello little piggy bank!! If you are a homeowner and you're paying attention to the current housing market then you may be looking at your home with big animated dollar signs popping out of your eyes.

The housing market is leading to a lot of homeowners refinancing their homes and pocketing some of their homes equity. Seems like easy money doesn't it? Well, Freddie Mac is warning people to slow down and think a little harder about this decision. "In 2020, about $185 billion of equity was taken out through cash-out refinances – the highest amount since 2007" according to Fannie Mae and Freddie Mac.

Cash-out refinances make a lot of sense for homeowners that need some quick cash to cover medical bills or other long term investments like college or renovation. Sounds like a no-harm, no-foul situation. However there is one big thing to consider. When the market is crazy, like it is right now, and the home prices continue to rise, like they are right now, homeowners run the risk of the their home value falling below their home loans actual value.

Thanks to stricter lending laws, lenders and homeowners are also being more cautious: "36% of 2020 cash-out refinances resulted in a mortgage balance 5% or greater than the previous balance. From 2005 to 2008, it was 78%." according to Fannie Mae and Freddie Mac.

Overall, homeowners considering a cash-out refinance need to recognize the importance of not missing payments and to be aware that refinancing still costs money. Closing costs could make up 2% to 5% of the loan amount. 

Source: “Tempted to Turn Your Home’s Soaring Equity Into Cash? Don’t Do it Lightly: Fannie Mae Chair,” Yahoo! Money (June 26, 2021)