The credit scores of cash-out refinance mortgage borrowers experience a sharp improvement followed by gradually worsening before stabilizing, according to a recent Consumer Financial Protection Bureau report about cash-out refinance mortgage borrowers’ financial outcomes.
At the time of refinancing, cash-out borrowers had large decreases in auto loan and credit card balances but not student loan balances. In the quarter after refinancing, credit scores increased significantly. After a year, most credit card balances and use rates returned to approximately their pre-refinance levels while credit scores decreased but remained above pre-refinance levels.
A cash-out refinance allows homeowners to access home equity to pay off debts or fund home repairs, but it also puts homeowners at an increased risk of foreclosure.
The report examined borrowers between 2014 and 2021 and found that cash-out borrowers frequently have different debt profiles than other homeowners and often used cash-out refinance money to pay down debts such as credit cards and auto loans. Before the mortgage transaction, cash-out borrowers had mean credit card balances that were approximately $4,000 higher than other homeowners and mean student loan balances that were approximately $4,000 lower.
The most common reasons for cash-out refinancing were to pay off other bills, or home repairs or new construction.