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Cash obtained in refinancing found to be used wisely


HOW SMART ARE homeowners who pull hefty sums from their home equity using cash-out refinancing?

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 might surprise you. The first comprehensive national economic study of the past three years of refinancing mania has concluded that:

Homeowners who extracted cash from their homes through refinancings during 2001-2003 generally were not only smart but used the funds prudently.

The refinancing boom has led to lower, not higher, household debt-service burdens, higher personal savings rates and higher family net worth.

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 refinancing over the past three years. During that period, according to the study, nearly $5 trillion in American home mortgages were refinanced, while equity withdrawals reached as high as an annualized rate of $450 billion.

Homeowners used the cash-out 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 was homeowners' tendency to use their equity to further strengthen their financial situations. During 2001-2002, for example, 16 percent of home equity withdrawals were used to pay for purchases such as autos, vacations and education, the study found. By contrast, 26 percent of 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 New York Fed 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, new real estate assets, and they even began saving more of their disposable personal incomes.

Better yet, refinancing has put millions of households in a stronger position to spend more on consumer goods and investments in the years ahead, which would keep the national economic recovery on track.

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

With mortgage rates lower than they've been since July, lenders report a surge of refinancing applications and cash-out 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 refinancing candidates today.

That's because 30-year fixed rates are hovering in the 5.6 percent range, down from 6.26 percent in July. More intriguing for baby boomer refinancers is the decline of 15-year fixed rates to 4.95 percent.

(The 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.)

Say you refinanced twice or three times in recent years and have a 30-year fixed rate of 5.75 percent. You had assumed that that loan was your last mortgage and that you'd pay it off when you sold the house.

But wait. The game might not be over. You could shed that 30-year mortgage and replace it with a 15-year loan at the near-record low fixed rate of 4.97 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 15 years.

Some Wall Street analysts suggest that at today's rates, 40 percent or more of homeowners have mortgages with rates that qualify them as refinancing candidates this year.

Who knows? Maybe you're one of them.

Ken Harney's e-mail address is

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