Residential mortgage debt is on the rise as prices have rebounded and homeowners are once again leveraging equity in their homes for everything from vacations to new cars.
Homeowners pulled more than $68 billion in equity out of their homes via cash-out refinance transactions in 2015 — the most since 2009, and a 53 percent increase over 2014, according to the latest Mortgage Monitor Report from Florida-based Black Knight Financial Services.
That’s more than $60,000 per borrower, on average, according to the report.
Unlike a standard refinance, which allows borrowers to snag a lower mortgage rate or shorten terms, a cash-out refinance is for a larger amount than the existing mortgage loan, which means borrowers assume even more debt tied to the equity in their homes.
Such borrowing was one of the main reasons more than 40 percent of homeowners were underwater, or owed more on their properties than they were worth, when the housing market collapsed during the most recent recession.
While equity borrowing is nowhere near the peak levels before the 2007-2008 recession, the rise in equity borrowing is a disturbing trend at a time when the number of homeowners who still are underwater is well above normal levels, making up 6.5 percent of all mortgages, according to Standard & Poor’s/Case-Shiller, which tracks residential real estate trends.
“Individuals who take out these equity loans are putting their homes at risk because they’re taking unsecured debt and rolling it into the debt secured by their home,” said Dolly Warren, a certified credit counselor at Consumer Credit Counseling Service in Dayton. “If a crisis should happen again, then they are going to be back in that same situation” of having an over-leveraged home loan and too much debt.
A big reason for the revival in equity borrowing is the steady climb in home prices. Nationwide, the amount of equity owners hold in their homes is approaching a 10-year high as stronger demand and tight inventories continue to push home prices up.
In January, the Standard & Poor’s/Case-Shiller 20-city home price index rose 5.7 percent from a year earlier.
In the Dayton area, February’s average sales price was $123,836, up 4.6 percent from the same month a year ago, according to the Dayton Area Board of Realtors (DABR). Meanwhile, the median price — the point at which half of the homes sold for more and half sold for less — was up 10.5 percent from last year to $108,000.
The price appreciation has allowed some borrowers to leverage equity in their homes for home improvements, debt consolidation and emergency expenses. But Ralph Mantica, a local Realtor and former DABR president, said he’s seen signs that homeowners are beginning to borrow more against their rising equity, even when it’s not necessary.
“Buyers have to be more in tune with the real value and purpose of the house,” Mantica said. “If you pull equity out of your home and put the investment back into the house, I don’t have a problem with that because that’s one way of increasing the value of your home.
“But if you use that money to take a cruise for week, well, you’ll have a really nice week, but when you come back you’ll be paying for that cruise for the next 30 years,” he said. “That’s where you get into trouble. We’ve seen it before.”
Still, there are signs that many homeowners are paying down their mortgage debt and resisting the temptation to use their homes as an ATM, even though historically low interest rates and price appreciation make it very tempting.
According to Black Knight’s report, the inventory of loans in negative equity positions dropped by 31 percent (1.5 million) in 2015.
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