CFPB Releases Report on Cash-Out Mortgage Refinances

The CFPB recently released a report on how cash-out mortgage borrowers between 2014 and 2021 used their funds from a refinance and how credit card utilization and credit scores changed before and after the refinance event.

While paying off non-mortgage debts with home equity can make financial sense if the interest on the new mortgage amount and origination fees is less than the cost of continuing to pay down other higher-interest debt, the CFPB has been concerned that converting non-mortgage debt into mortgage debt secured by the home can put the home at risk of foreclosure, while defaulting on non-mortgage debt is unlikely to result in the loss of the home.  Among key findings in the report:

• Cash-out funds during this time period were primarily used to pay down credit cards and auto loan debt.
• Borrowers experienced an initial credit score increase following the refinancing.
• Credit score increases gradually declined over time but remained higher than pre-refinance levels.
• Borrowers typically had higher credit card debt and lower student loan debt compared to other borrowers.

The report concludes that even with the observed paying down of outstanding debt by cash-out refinance borrowers in the study, the financial benefits of extracting equity by cash-out refinancing will vary based on individual circumstances and market conditions. The rise of interest rates during the period starting in 2022 is likely to result in additional costs to consumers and reduce the benefits of cash-out refinances for consumers.