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Savvy homeowners may consider refinancing in 2004

Published Aug. 27, 2005

How smart are homeowners who pull hefty sums from their home equity using cashout refinancings?

Don't they risk ending up in a more precarious financial position because they are piling additional, heavy debt on their homes?

The answers to both questions may surprise you. The first comprehensive national economic study of the last three years of refi mania has concluded that:

+ Homeowners who extracted cash from their homes through refinancings from 2001 to 2003 generally were not only smart but made prudent use of the money.

+ The refi boom has led to lower, not higher, household debt, higher personal savings rates and higher family net worths.

The study, conducted by three economists at the Federal Reserve Bank of New York (Margaret McConnell, Richard Peach and Alex Al-Haschimi) examined the financial effects of the unprecedented tidal wave of refinancings over the past three years. During that period, according to the study, nearly $5-trillion worth of American home mortgages were refinanced and equity withdrawals reached as high as an annualized rate of $450-billion.

Homeowners used the cashout proceeds for a variety of purposes, including well-publicized mass purchases of consumer goods that buoyed the national economy and kept it out of a prolonged recession.

Less well-documented, however, was homeowners' tendency to use their equity to further strengthen their own financial situations. During 2001 and 2002, for example, just 16 percent of all home equity withdrawals were used to pay for purchases such as autos, vacations and education, the study found. By contrast, 26 percent of all equity withdrawals were used to repay or consolidate other, generally higher-cost debts such as credit card balances and personal loans.

An additional 35 percent was plowed into home improvements, 11 percent went toward stock market and other financial investments, and 10 percent was used for additional real estate or business-related investments.

American homeowners exhibited "financial prudence rather than profligacy," said the economists. Consumers "have used their withdrawals of (home equity) funds to restructure their balance sheets and reduce their debt service burdens." In the process, homeowners also acquired substantial new income-earning financial assets and new real estate assets, and they even began saving more of their disposable personal incomes.

Better yet, refi mania has put millions of households in a stronger position to spend more on consumer goods and investments in the years ahead, thereby keeping the national economic recovery on track.

The study doesn't attempt to look at 2004's mortgage market prospects, but here's the continuing good news: You can call it an extension of the refi boom years. Or you can call it the refi boomlet of 2004. Whatever it is, refi madness is back.

With mortgage rates lower than they've been since last July, lenders report a surge of new refi applications and cashout transactions. Should you even think about it?

Frank Nothaft, chief economist for giant mortgage investor Freddie Mac, suggests that even serial refinancers _ including those who took out their current loan as recently as last summer _ might be logical refi candidates today.

That's because 30-year fixed rates are hovering in the 5.6 percent range, down from 6.26 percent last July. More intriguing for baby boomer refinancers is the decline of 15-year fixed rates to 4.95 percent. (Both 30-year and 15-year rate quotes come with 0.6 percent in points. A point is equal to 1 percent of the loan amount, generally paid at closing.)

Consider this: Say you refinanced twice or three times in recent years and now you are sitting with a 30-year fixed rate of 5.75 percent. You had assumed that that loan was your last-ever mortgage and that you'd pay it off when you sell the house.

But the game may not be over. You could shed the 30-year mortgage in the high 5 percent range and replace it with a 15-year loan at the near-record low fixed rate of 4.95 percent. Your monthly payments will be higher with the shorter-term mortgage. But if you plan to stay in your current house for the foreseeable future, the added payments will speed you to that Valhalla of homeownership: a debt-free house in just 15 years.

Some Wall Street analysts suggest that at today's rates, 40 percent or more of all homeowners have mortgages with rates that qualify them as refi candidates in 2004.

Who knows? Maybe you're one of them.

E-mail Ken Harney at