US home cashout refinancing falls to lowest since 2000 after Fed hikes

By Alex Tanzi

US interest-rate hikes have dented a key source of consumer funds — home-equity build-ups.

Cash-out refinances — where property owners borrow against the equity in their homes — fell to less than 17% of total mortgage loans in the second quarter, the smallest since late 2000, data released Tuesday by the Federal Housing Finance Agency showed. 

That compares with 46.1% in the first quarter of 2022, just as the Federal Reserve started its most aggressive interest rate-hike campaign in a generation. In that three-month period, the average 30-year mortgage rate was 4%, compared with 6.95% in the second quarter of this year, Bankrate.com data show.

Over the past 20 years, close to 30% of mortgages on average was for home equity withdrawals. In an era when mortgage rates were falling and home prices were rising, this often meant a homeowner was able to increase the size of their mortgage by pulling cash out of the home, but would see little change in the monthly payment.

Property owners have typically used the extra funds to finance spending, pay for home improvements, settle debt, or buy other assets. With cash-out refinancing less attractive, a key support of consumption is removed.

US homeowners hold record equity in their homes, limiting the downside risk to the housing market. But the increase in mortgage rates means that tapping this equity is much more expensive. 

Past studies have indicated that more than a quarter of the net proceeds from cash-out refinancings are used for the repayment of debt such as credit cards. Therefore, as homeowners shun cash-out refinancing, many of will have to cut back on spending to deal with elevated debt loads and higher debt service costs.