WASHINGTON, D.C. — A new report from the Consumer Financial Protection Bureau (CFPB) highlights significant credit and debt trends among borrowers who opted for cash-out refinance mortgages between 2014 and 2021. The study shows that while cash-out borrowers initially benefit from improved credit scores and reduced debt, those gains often diminish over time.
Borrowers frequently cited paying off other bills or debts as their primary motivation for cash-out refinancing. According to the CFPB, “Each year, from 2014 to 2019, more than 50% of cash-out borrowers responding to the National Survey of Mortgage Originations selected ‘paying off other bills or debts.’ For 2020 and 2021, more than 40% selected that reason.” Home repairs and new construction were consistently ranked as the second-most common reason.
The report reveals distinct financial profiles among cash-out borrowers. Before refinancing, cash-out borrowers typically carried higher average credit card balances—around $4,000 more—than other homeowners, while student loan balances were roughly $4,000 lower. Auto loan balances were similar between the two groups.
Cash-out borrowers experienced notable improvements in their debt and credit metrics immediately after refinancing. Credit card and auto loan balances dropped significantly, and credit scores sharply increased within the first quarter post-refinance. However, over the following year, credit card balances and usage rates trended back toward prior levels, although they did not surpass pre-refinance levels. Meanwhile, credit scores declined slightly but remained higher than prior to refinancing.
The CFPB’s findings underscore the complex financial outcomes tied to cash-out refinancing, a practice that converts home equity into liquid funds. While it offers short-term relief for managing debts or addressing financial needs, borrowers must weigh the long-term risks, including the potential for increased mortgage debt and foreclosure. Home equity remains one of the leading financial assets for U.S. families, making such decisions pivotal for maintaining financial stability.
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