Near rock-bottom mortgage interest rates are behind a surge in refinance activity.
After hitting an 18-year low at the end of last year, refinance lending has nearly doubled over the past three quarters, according to Black Knight. In the third quarter of this year, refinance volume was up 132% annually to its highest level in nearly three years.
Most of the refinancing in the third quarter of this year was done by borrowers looking to improve their rate or the term on their current mortgage. But a growing number of borrowers are taking money out of their homes.
Cash-out refinances were up 24% since the last quarter of 2018 and made up 52% of all refinances. Homeowners withdrew a collective $36 billion in home equity, the highest amount in nearly 12 years.
This despite the fact that tappable equity, the amount available to borrowers while still retaining 20% equity in the home, fell slightly, down 1% from the all-time high in the second quarter. Tappable equity is still up 5% annually. Of the approximately 45 million borrowers who have tappable equity, about 65% have interest rates higher than today's rates.
"Given that tappable equity continues to grow – $6.2 trillion as of Q3 2019 – and the continued headwinds facing the HELOC (home equity line of credit) market, this is a segment lenders and servicers may likely focus on in coming months," said Ben Graboske, president of Black Knight Data and Analytics. "Any upward movement in rates would likely only drive the cash-out share of lending higher."
Borrowers who took out their mortgages in 2018 made up a growing share of refinances this year. They accounted for one in five in the first two quarters of this year, but then jumped to make up one third of refinance originations in the third quarter.
Newer loans from last year have much higher balances, and interest rates were about a full percentage point higher then than they are today.
Borrowers last year had pre-refinance loan balances of, on average, $380,000, and early-2019 loans had balances of $560,000.
Homeowners who refinanced out of loans made in 2008-2011 had much smaller average balances ($160K-$172K), but more than 80% of those refinances were cash-outs.