Boston area homeowners are enjoying higher home values and are using their equity to take cash out of their properties by refinancing. Surprisingly, however, they are doing it conservatively –– more than any other time in recent history. A closer look reveals why that may be the case.
“Take Only What You Need” – Boston Area Homeowners
In earlier times, such as the years leading up to the housing crash in 2008, homeowners regularly used their properties like ATM machines, taking as much cash out as their lenders would legally allow. With values inflated and equity almost non-existent, the amount they refinanced for was high compared to the home’s worth. That and other actions led to millions of American homeowners being “upside down” or “underwater” on their mortgages. Ultimately more than 7 million homes ended up in foreclosure.
Since then, lending practices have been shored up dramatically to safeguard against the same thing happening again. In addition, today’s borrowers are considerably more risk conscious – and are slower to add debt they don’t need. Homeowners are still borrowing against their equity, with 42% of refinances in 2015 being for the purpose of taking cash out, not just refinancing to get a lower interest rate.
For most recent refinances, the average cash-out amount was slightly more than $60,000 and the average LTV ratio was 67%, the lowest level in history. The total amount of equity received through refinances in 2015 topped the $64 billion mark, the highest amount for any 12-month period since 2008-2009. Despite the record amount, homeowners showed remarkable fiscal restraint by not tapping into the remaining equity.
Economists say consumers are saving more now than they did during the years immediately after the housing crash. According to the Commerce Department, the savings rate in December 2015 climbed to the highest level in over three years. In addition, the borrowers refinancing to get cash enjoyed an average credit score of 748 – high for homeowners seeking refinances. This reinforces the position of mortgage lenders being risk-averse, but it’s also a sign borrowers are taking only what they need. Simply put, they’re leaving money on the table.
While Boston area homeowners still have most of their equity intact, they seem to be just fine with that. The memories of financial crises like the housing crash or even the Great Depression has had a lasting, memorable effect on a generation who vows not to go through it again. Plus, since interest rates on savings accounts have been so low, many baby boomers are staring at retirement wondering how they’ll manage. Other workers of all ages have learned to look at their finances more cautiously. They’ve seen high unemployment, and they know the horrors of losing a home to foreclosure.
As a result, Boston area homeowners in today’s economy take out only what they need when they refinance or get home equity loans. They begin paying it back almost immediately every month. For home equity loans, some banks require amortized payments, but not all do.
Borrowers typically are using their cash equity for home improvements, college tuition and rising health care costs. This is in stark contrast to the borrowers of just a decade ago, when home equity was used to purchase luxury items like boats, RVs, vacations and other extravagances.
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