Tapping Home Equity: Income and Spending Trends Around Cash-Out Refinances and HELOCs

Abstract

Approximately two thirds of American families own a home and for most homeowners, their house is also their most important source of wealth. Homeowners are currently sitting on historically high levels of home equity and the potential withdrawal of this home equity has important implications for consumption at the macroeconomic and household levels. In this report, we examine the extent to which liquidating home equity boosts consumption, as well as how income dynamics around equity extraction may play a role in influencing households’ decision to draw from this source of wealth. Using loan-level servicing data from Chase mortgage customers combined with corresponding Chase deposit account data from 2012 to 2018, we create a sample of more than 50,000 homeowners who either obtained a cash-out refinance or drew on a home equity line of credit (HELOC). We find that for homeowners who cash-out refinanced, most refinanced into a lower interest rate but a higher monthly payment because of a larger loan balance. Also, after controlling for secular trends, homeowners who obtained a cash-out refinance had no change in income whereas homeowners who extracted equity via a HELOC experienced declining income. For both groups, consumption spiked considerably as soon as the liquidated equity flowed into the bank account but quickly settled to steady state-levels at a higher level, 5 percent and 7 percent above baseline for HELOCs and cash-out refinances, respectively. After one year, cash-out refinance homeowners spent 33 percent of their total equity extracted while those with a HELOC spent 47 percent overall. For both sample groups, these marginal propensities to consume (MPCs) were highest for younger homeowners and those with higher loan-to-values (LTVs). Taken together, these findings have important implications for macroeconomic and housing policies.