A recent surge in cash-out refis has defied expectations.
Black Knight’s Mortgage Monitor report reveals that these cash-outs are primarily being sought by borrowers with lower balances – $165,000 on average – who are looking to withdraw larger amounts of equity at lower rates than current HELOC offerings.
The profile of cash-out borrowers – who made up roughly 90% of all refinances in the second quarter – has shifted considerably in recent quarters, Black Knight, now part of Intercontinental Exchange Inc., says in the report. While the average unpaid principal balance of borrowers entering a refinance has fallen from $319,000 in early 2020 to $183,000 in August, it is even lower when looking specifically at cash-outs.
Alongside rising interest rates, the average equity withdrawal among cash-out refinances has also risen by nearly 90% from its low in 2020, Black Knight says.
Cash-outs may make sense for borrowers with lower balances – on which they give up a lower rate – looking to withdraw larger amounts of equity – at lower interest rates than what is available via a HELOC, the firm says.
The average credit score for a cash-out borrower as of Q2 was 715. While still relatively strong, this is down more than 40 points in less than three years and is among the lowest in the post-Great Financial Crisis era.
Higher credit borrowers who can qualify in today’s market are more likely opting for HELOCs as a way of tapping equity, leaving a lower credit score residual among cash-out refis, Black Knight says.
The firm notes, however, that refinances are currently at only a fraction of the volume they were two years ago.
Photo: Giorgio Trovato