The Consumer Financial Protection Bureau published a report analyzing the financial outcomes for borrowers who utilized cash-out refinance mortgages between 2014 and 2021. The data indicates that while these borrowers experienced an initial sharp improvement in credit scores, those scores gradually worsened over time, though they generally remained above pre-refinance levels.
The report confirms that borrowers frequently use the proceeds from cash-out refinances to pay down other debts, particularly credit card and auto loan debt. Paying off other bills or debts was cited as the most common reason for cash-out refinancing, with more than 50% of respondents selecting this option annually from 2014 to 2019, and more than 40% doing so in 2020 and 2021.
Before the mortgage transaction, cash-out borrowers exhibited different debt profiles than other homeowners. Mean credit card balances were approximately $4,000 higher among cash-out borrowers, while mean student loan balances were approximately $4,000 lower. Mean auto loan balances were similar in magnitude for both groups.
At the time of refinancing, cash-out borrowers saw large drops in credit card and auto loan balances, though they did not generally experience large drops in student loan balances. Correspondingly, these borrowers saw sharp increases in their credit scores in the quarter following the refinance.
In the year following refinancing, credit card balances and use rates trended back toward pre-refinance levels but did not increase to those levels. Credit scores likewise decreased during this period but remained above pre-refinance levels.
The report notes that while home equity is a significant source of savings, paying non-mortgage debts with mortgage debt can increase the risk of foreclosure. "Home repairs or new construction" was the second-most common reason cited for cash-out refinancing each year.