Cash-Out Refinancing Returns, Boosting Remodeling Activity
Key takeaways
- Remodeling is about to get a boost as cash-out refinancing activity springs back to life after more than 2 years at rock bottom.
- Cash-out refinancing makes up about 13% of all loan locks today (+24% YOY) after a significant drop in mortgage rates, according to Optimal Blue.
- Cash-out refinancing peaked at 29% of all loan locks in late 2021, which teed up remodeling for a boom.
The ~80bps drop in mortgage rates between July and September spurred an uptick in refinancing, as households who plan to stay in their homes longer were willing to capitalize on the option to obtain lower market mortgage rates and withdraw home equity.
Stronger cash-out refinancing activity is a leading indicator for the residential remodeling market. Homeowner equity per owned household is around $400,000, and cash-out refinanced remodels are generally larger in size and scope than other remodels.
Refinancing is back on homeowners’ radar
Refinances now comprise 25% of all mortgage locks: 13% are cash-out refinancing, and 12% are refinancing to a lower rate.
As a general rule, a 1 percentage point drop in mortgage rates can reduce monthly payments by about 10%, leading to substantial savings over the loan’s life and freeing up funds that homeowners can direct toward major expenditures like remodeling projects.
Cash-out refinancing took off in the second half of 2021. The pandemic squeezed a decade’s-worth of home price growth into 2 years, and consumers were ready to take advantage. Cash-out refinances peaked at 29% of loan locks in the final months of 2021. The rise in cash-out refinancing supported remodels that were generally larger in size and scope, an important shift from the initial Covid-induced small project, DIY remodeling boom.
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