Cash-Out Mortgage Refinance Borrowers use money to pay off debts

The Consumer Financial Protection Bureau (CFPB) has published a report about financial outcomes for cash-out refinance mortgage borrowers.

The report confirms that borrowers often use the money from a cash-out refinance to pay down other debts, particularly credit card and auto loan debt.

Home equity is the third-most common financial asset for families and a significant source of savings for homeowners.

A cash-out refinance lets homeowners tap into their equity to pay off other debts or fund needed home repairs, for example. At the same time, paying non-mortgage debts with mortgage debt can increase the risk of foreclosure.

Borrowers gave “pay off other bills or debts” as the most common reason for cash-out refinancing.

“Home repairs or new construction” was the second-most common reason cited each year.

Cash-out borrowers had large drops in credit card and auto loan balances at the time of refinancing but did not generally experience large drops in their student loan balances.

Similarly, cash-out borrowers had sharp increases in their credit scores in the quarter after refinance. Credit card balances and use rates trended back toward pre-refinance levels in the year following the refinance, but they did not increase to the pre-refinance level in that time.

Credit scores likewise decreased in the year following refinancing but remained above pre-refinance levels.