Cash-out Refi Customers Largely Used Proceeds To Pay Down Debt

Consumers who chose to take out a cash-out refinance largely used the loan’s proceeds for paying down existing debts, with notable impacts on credit card and auto loan balances as well as credit utilization rates. Cash-out borrowers also saw increases in their credit scores on average, while scores for non-cash-out borrowers decreased.

This is according to a recent report published by the Consumer Financial Protection Bureau (CFPB), which is based on data from the National Mortgage Database (NMDB) and the National Survey of Mortgage Originations (NSMO).

One source of debt that was not heavily impacted, according to the data, were student loan balances.

“27.2% of cash-out refinance borrowers with student loan balances had a balance decrease of 10% or more after the refinance,” the report explained. “Cash-out borrowers’ average student loan balances declined gradually during the year following the refinance, also suggesting regular paydown behavior — but unlike credit card and auto loan balances, average student loan balances did not show sharp declines.”

The quarter in which a refi transaction was originated saw sharp increases to the credit scores of cash-out borrowers, the report noted.

“Even though average credit scores moved back towards the pre-refinance average for both groups of borrowers, the average credit score for cashout borrowers remained elevated in the year following the refinance,” the report said.

Average credit card balances and overall credit utilization rates showed increases in the year following the cash-out transaction. But “average balances and utilization rates stayed below their pre-refinance levels up to five quarters post-refinance,” the report noted.

In a statement provided to HousingWire, the Community Home Lenders of America (CHLA) lauded the results of the report as evidence of a positive difference in the financial affairs of homeowners.

“CHLA is pleased [that Friday’s] CFPB report has confirmed not just that mortgage refis reduce mortgage payments, but that they also improve homeowners’ credit scores,” the organization said. “However, CHLA continues to call on federal policy makers to take action to address flaws in the refi process — by reining in abusive trigger lead solicitations and by curbing exploding closing costs in non-competitive areas like FICO score fees.”