Not Cashing In on Cashing Out: An Analysis of Low Cash-Out Refinance Rates

Lowering a borrower’s interest rate is one of the most effective ways to reduce a borrower’s debt burden. Mortgage refinancing offers a chance to shift debt balances from high-interest loans into a low-interest mortgage through “cashing out” some of the home’s equity. Borrowers could reduce their monthly payments by up to 13 percent by folding a student loan with a 6 percent interest rate into a mortgage with a 3 percent interest rate. Using anonymized data on mortgage refinancing behavior, we find that over half of borrowers with high-interest loans and available home equity do not take advantage of their cash-out opportunities. Strikingly, this pattern is seen among borrowers who have already chosen to refinance their mortgage, thereby overcoming inertia, information frictions, and large fixed costs associated with the decision to refinance. Furthermore, even when the last remaining fixed cost (cash-out surcharge) is eliminated for student-loan borrowers by a policy change at Fannie Mae, we find that the presence of a student loan does not significantly affect borrowers’ propensity to cash out after these surcharges are eliminated.