What’s happening right now?
Currently, we are seeing numerous cash-out refinances. One of the questions floating around is, “are we seeing a cash-out refinance crisis?”. When we take a look at the comparison of cash-outs in 2006 compared to today we see that home equity cash-outs by refinancing is currently 153 billion compared to a whopping 321 billion in 2006. This last year was a great year to refinance as interest rates were incredibly low compared to the interest rates in 2006 which was around 6.5%.
On the graph to the right, we can see in 2006 that the tappable equity was just under 5 trillion dollars in the country compared to today, where we see tappable equity is much higher as it’s over 7 trillion. Today is the inverse of a boom in several ways, one of them being the amount of equity homeowners have in their homes.
We are seeing people doing cash-out refinancing a little more than we usually would. This is not to raise concern because when you look at the context of why they’re doing this it makes sense. Interest rates are low, so why not take advantage of this opportunity to lower your interest rate? Also, if you’re a homeowner sitting in a home with lots of equity, why not take some of that cash out and invest it or use it to support your family during this trying time. As long as homeowners are not exceeding the tappable equity then this should not raise much concern.
Forbearance
There are currently 2.6 million mortgages in forbearance. We do expect that number to come down in the future. Let’s talk about what’s happening as people come out of forbearance. As we take a look at the graph below we can see 49.9% were brought current, 34.2% worked out a repayment plan, 15.9% were still in trouble. We are seeing people making their move out of forbearance. Some are tapping into their home’s equity to do this, some are selling, and with recent covid stimulus relief checks being distributed, some are using those to help themselves.
Foreclosures
The average amount of foreclosures is 2 thousand per quarter. We currently have tighter lending standards and much lower foreclosures. We expect foreclosures to be higher this year because many foreclosures were essentially paused and will now resume this year. It’s very important that the people who may be in jeopardy of losing their home know their options. For example, most homes have accumulated sizeable equity that could in fact help turn what could’ve been a foreclosure into a sale. We see the low inventory of homes and how competitive it can be to get an offer accepted and we see the benefits that sellers getting as most homes are selling over list price. If we could seek out to help those families in danger of foreclosure to experience that same thing then we will definitely be doing something right.
Closing Thoughts
We are seeing cash-out refinances more frequently, but it makes sense as homeowners have much equity in their homes. We have seen interest rates incredibly low and we have seen homeowners take advantage of this opportunity to lock in a better rate for their mortgage. Also, this last year has been challenging for many families and if tapping into their equity has helped them to better weather the storm then that is completely understandable. Unfortunately, we expect to see more foreclosures this year as the process resumes. It is incredibly important that we become the knowledge broker because with the right information you can make a big difference. Let’s be sure we are looking at data and not just terrifying headlines. Let’s guide homeowners who aren’t aware of their options and do all we can to make a difference.
As always, we are your friends in real estate, here for all your real estate needs.
The Freund Group with Compass Real Estate.