Refinancing Improves Household Finances

by Broderick Perkins DeadlineNews.Com Indicating consumers are wiser than hand-wringing doom sayers gave them credit, a federal reserve bank study revealed refinancing consumers in recent years did the right thing with cash proceeds from refinanced home loans. The extended refi-boom spawned by record low interest rates ushered in a host of warnings that consumers attracted by record low interest rates could refinance themselves -- and the economy -- right into the poor house. Home buying, equity borrowing and refinanced mortgages in recent years revealed a shift away from stock market and other investments and toward the more tangible investment of shelter and that concerned some economists and consumer financial experts as the ranks of refinancing borrowers swelled with home owners boosting their mortgage debt to risky levels greater than their home value. "The current refinancing boom is interesting because it appears to represent a structural change in the economy," according to the Federal Reserve Bank Of San Francisco's "Economic Letter: Mortgage Refinancing" late last year. Apparently, those who went overboard with mortgage debt were the exception rather than the rule according to "After The Refinance Boom: Will Consumers Scale Back Their Spending?" by three economists at the Federal Reserve Bank of New York -- Alex Al-Haschimi, Margaret McConnell and Richard Peach. The report says more than one out of every four home owners refinanced mortgages in 2003 as consumer spending provided an important economic stimulus -- but not to the detriment of consumers who used cash-out proceeds wisely. "During this boom of mortgage refinancing and equity withdrawal, the pace of consumer spending remained consistent with prior periods; despite the availability of additional resources through refinancing and equity withdrawal, consumers did not spend a greater proportion of their disposable income on consumption," the report said. To the contrary, the report said, consumers slowed their rate of indebtedness, increased personal savings and increased their net worth. "As a result, households may be in a better position to spend in years ahead," the federal reserve bank reported. That's because, as financial experts advise, most refinancing consumers wisely used the money on debt consolidation or capital investments which provide a return on their money. The report said 51 percent used refinancing to consolidate debts typically at a lower cost thanks to low interest rates; 26 percent performed home improvements which can add value to the home; 25 percent used the money on consumer expenditures, including vehicle purchases, vacations and living expenses, but also education, which, unlike the other purchases provides a form of return; 13 percent used refinancing cash out to make stock market and other financial investments and 7 percent used the money to invest in real estate or business. "Consumers have used their withdrawn home equity to restructure their balance sheets and reduce their debt service burdens. The picture that emerges is one of financial prudence rather than profligacy. It appears that households, in the aggregate, have been using mortgage debt to restructure their balance sheets. As a result, household net worth on a flow basis has not been impaired by the increase in debt stemming from home equity withdrawal," the report concluded. Copyright © 2004 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.