Paying down non-housing-related bills or debts, such as credit card balances, and long-term credit score improvement are two benefits from cash-out refinancing, the Consumer Financial Protection Bureau (CFPB) explains in an updated report on a December 2023 research topic from the consumer watchdog. The CFPB examined how cash-out borrowers between 2014 and 2021 used funds from a refinance.
“Paying off non-mortgage debts with home equity can make financial sense if the cost of extracting cash with the refinance – the interest on the new mortgage amount, plus any origination fees – is less than the cost of continuing to pay down other higher interest debt (e.g., the interest on an existing car loan) and any existing mortgage,” the CFPB noted in its report.
However, the CFPB found that more consumers used refinance equity to pay off other bills and debt in the earlier years studied than more recently. From 2014 to 2019, between 53.1% and 66.5% of refinancers each year chose “paying off other bills or debts” as the use of their resulting equity, while for 2020 and 2021, between 43.5% and 45.2% gave that same response.
Meanwhile, more cash-out borrowers put equity into savings in 2021 than in 2014 – 23.8% versus 15.7%, respectively. After paying down other debt, the second-most commonly cited use for refinance equity was “home repairs or new construction.”
Cash-out refinance borrowers were likely to have large credit card balance decreases around the time of refinance, according to the CFPB, and “a sharp decrease” in average credit card balances during the quarter of the refinance and in the quarter following the refinance.
Other findings from the report include:
- More than half – 57.2% – of cash-out refinance borrowers with credit card balances had a balance decrease of 10% or more following the refinance.
- Cash-out borrowers’ average credit card balances decreased by more than $4,500 from the quarter before the refinance to the quarter after the refinance.
- More than two-thirds – 68.5% – of cash-out refinance borrowers with auto loan balances had a balance decrease of 10% or more after the refinance.
- Before refinancing, mean balances for some debt types differed between cash-out refinance borrowers and non-cash-out borrowers, CFPB found. Cash-out borrowers had a mean of about $4,000 higher credit card balances and about $4,000 less in their student loan balances.
In addition, borrowers’ refinancing and debt repayment ultimately helped boost credit scores.
Cash-out refinance borrowers had notable increases in their credit scores in the quarter after refinancing, the CFPB report found. However, credit card balances and use rates “trended back toward pre-refinance levels” in the year following a refinance, “but did not in that time increase to the pre-refinance level.”
Correspondingly, cash-out borrowers’ credit scores decreased in the year following refinancing, but remained above pre-refinance levels.
