Homeowners are sitting on trillions in cash

A homeowner trims her yard in the Kenwood Park neighborhood of Bethesda, Md.

With mortgage rates currently lower than they were a year ago, cash-out refinances have been growing in popularity.

Borrowers doing cash-out refinances withdrew $68,000 in equity on average for a total of $26 billion in the third quarter of last year. Cash-outs now account for 62 percent of all refinances, but it is still far far less than during the housing boom in 2005, when borrowers were essentially using their homes as cash machines.

“The Great Recession wasn’t all that long ago, and the memory is likely still in the backs of minds of both lenders and borrowers alike,” Graboske said.

Lenders are considerably more risk averse today, so mortgage underwriting is much more strict. Borrowers are exhibiting more restraint as well, in terms of both deciding whether or not to tap into that available equity, and if so, how much, according to Graboske.

There is also the possibility that home values in some regions most affected by the new tax law could fall, causing homeowners to lose some of this new-found equity.

Homeowners can now only deduct $10,000 in property taxes. In high tax states, that could put downward pressure on home values. Homeowners with loans of more than $750,000, who are currently grandfathered into the $1 million mortgage deduction cap, should consult their tax advisors as to whether a cash-out refinance would change their status.The law is currently unclear on that point.

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