Investing.com -- According to a report published today by the Consumer Financial Protection Bureau (CFPB), borrowers who opt for cash-out refinance mortgages experience an initial significant surge in credit scores. Although the scores gradually decline over time, they consistently remain above the pre-refinance levels. The report analyzed borrower data from 2014 to 2021.
The study confirms that cash-out borrowers frequently use the refinanced funds to repay other debts, especially credit card and auto loan debt. Home equity, which is a substantial source of savings for homeowners and the third-most common financial asset for families, can be accessed through a cash-out refinance. This allows homeowners to pay off other debts or fund necessary home repairs. However, it also poses a risk of foreclosure if non-mortgage debts are paid with mortgage debt.
The CFPB report highlighted several key findings:
- The most common reason for cash-out refinancing, as cited by borrowers, was to "pay off other bills or debts." Between 2014 and 2019, over 50% of cash-out borrowers chose this reason in the National Survey of Mortgage Originations. In 2020 and 2021, the figure was over 40%. The second most common reason was "home repairs or new construction."
- Cash-out borrowers typically have different debt profiles compared to other homeowners. Prior to the mortgage transaction, cash-out borrowers had mean credit card balances about $4,000 higher. However, their mean student loan balances were around $4,000 lower. The mean auto loan balances were similar for both groups.
- Cash-out borrowers experienced a significant reduction in their debt load and a sharp increase in credit scores at the time of refinancing. These borrowers saw large drops in credit card and auto loan balances during refinancing, but not in their student loan balances. In the quarter following refinance, their credit scores sharply increased. Although credit card balances and usage rates trended back towards pre-refinance levels in the year following the refinance, they did not reach the pre-refinance level. Credit scores also decreased in the year after refinancing but remained above pre-refinance levels.
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