The CFPB recently released results of a study of residential mortgage refinance loans from the first quarter of 2013 to the first quarter of 2023, focusing on differences between cash-out and non-cash-out (or rate and term) refinance loans. The CFPB used data from the National Mortgage Database to conduct the study.
For purposes of the study, the CFPB considered a refinance loan to be a cash-out refinance loan “when the total value of sampled refinance loans and their associated junior liens were more than five percent larger than the total value of the preceding loans and associated junior liens.” This helps to exclude loans in which the consumer financed costs of refinancing into the new loan but did not receive any, or any material, amount of cash.
The CFPB highlights the following findings:
- Cash-out refinances were a larger share of all refinances during periods of rising interest rates.
- Borrowers of cash-out refinances had lower credit scores, lower incomes, and smaller loan amounts compared to non-cash-out refinance borrowers.
- Loan-to-value and debt-to-income ratios were similar for cash-out and non-cash-out refinances.
- Cash-out refinances had larger shares of older, female, Black, and Hispanic consumers, compared to non-cash-out refinances.
- Serious delinquencies were rare for consumers with higher credit scores, regardless of whether the refinance was cash-out or not.
- For consumers with lower credit scores, both cash-out and non-cash-out refinance consumers have similar two-year delinquency rates, except for a relative increase in delinquencies among cash-out refinance consumers in 2017—a year marked by rising interest rates.
For the study period, CFPB provides for cash-out and non-cash-out refinances the quarterly volume of loans, the median consumer credit score, the medium combined loan-to-value ratio, various loan and consumer characteristics, and rates of serious delinquencies (60 or more days past due) after two years with credit scores at or below 756 and with credit scores over 756. As noted above, for both types of refinance loans, delinquencies for consumers with the higher credit scores were rare, and for consumers with lower credit scores ranged from 0.7% to 1.0%, although the delinquency rates between cash-out and non-cash-out loans for such consumers were relatively similar.
The CFPB notes as potential concerns with cash-out refinance loans:
- The potential systemic risk of equity extraction contributing to a new financial crisis.
- Based on data from the JP Morgan Chase Institute, cash-out refinance loans had a longer loan term and larger monthly payment compared to the paid-off mortgage, which suggests that cash-out consumers are more likely to still be paying off their mortgage and less likely to own their home free and clear in retirement, potentially exposing these consumers to more future financial shocks while the mortgage is outstanding.
- A cash-out refinance with a higher interest rate than the prior paid-off mortgage could effectively lead to much higher borrowing costs, relative to the original mortgage or to other sources of credit, like home equity loans or home equity lines of credit, that do not raise the interest rate on the existing first-lien loan balance.
