Lenders say a growing number of luxury homeowners are turning to a prerecession tactic of withdrawing equity from their homes. And just like during the housing bubble, many of these affluent borrowers aren’t using this cash to renovate their homes. Instead, they’re pumping it into investments, including the stock market, other real-estate purchases or even using the money to purchase art, which they expect will generate large returns going forward. In other cases, they’re choosing to use this cash to pay for their children’s college tuition or other expenses that they’d otherwise finance with higher-interest debt.
Experts say the increase in cash-out refinancing comes at an opportune time: Interest rates remain near historic lows and the U.S. stock market is at record highs. Rates on 30-year fixed private jumbo mortgages—which start after $417,000 in most parts of the country and exceed $625,500 in pricey metro areas—average 4.02% as of the week ending March 22. That’s down from 4.70% a year prior and 5.49% two years ago, according to mortgage info website HSH.com. Rates on the 15-year fixed private jumbo average 3.30%, compared with 3.95% and 3.96%, respectively.
Low rates have paved the way for some borrowers to use their home equity as leverage. Rather than keeping cash locked in their home—banks say most cash-out refi borrowers have significant equity in their home or they own it outright—they’re choosing to put it to work elsewhere. Someone who owns a $2 million home outright could withdraw up to $1.6 million. (Most lenders require at least 20% equity to be left in the home after the cash-out refi.)
Separately, by refinancing to a significantly lower interest rate, some borrowers can end up with a lower monthly payment than they were previously paying despite ending up with a bigger loan. For instance, a homeowner who was paying a 5.46% rate (the average rate two years ago) on a $1 million, 30-year fixed mortgage would have monthly payments of roughly $5,652. If that borrower refinanced to a 4.07% rate in today’s market and took out a mortgage of $1.15 million, the monthly payment would be about $5,537.
While the number of private jumbo borrowers pursuing cash out refinancing is small, experts say it’s on the rise. Just over 61,000 of these borrowers did a cash-out refi during the 12 months ending early February, up 7% from the same period ending a year prior, according to data compiled for The Wall Street Journal by SMR Research, a mortgage-research firm in Hackettstown, N.J.
Large lenders cite even bigger increases. So far this quarter, Bank of America says close to 20% of all refinancings among its private jumbo borrowers involve cashing out compared with about 10% a year prior. TD Bank, which operates on the East Coast, says several thousand private jumbo borrowers signed up for a cash-out refi last year, citing a 50% increase from 2011. Citi Private Bank says more of its affluent private jumbo borrowers have been requesting cash out refinancing since last year.
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