Most Consumers Expect to Fatten Savings Accounts, Not Go on Buying Spree : Refinancing Surge Unlikely to Boost Spending

The recent surge in mortgage refinancing is expected to increase disposable income for many families, but it will not necessarily lead to an increase in consumer spending, according to economists.

Instead, homeowners who have recently refinanced are expected to increase personal savings, reduce existing debt or make life style changes that they may have longed for but could not afford before refinancing.

“I don’t expect to see a big surge in consumer spending because of the refinancings,” said Mark Obrinsky, economist for the U.S. League of Savings Institutions. “Consumers have been spending at high levels since last fall and have high levels of personal debt right now. Instead of new spending, we expect the personal savings rate to improve and debt to be paid off.”

The current rush to refinance, which is expected to continue through the summer, is being fueled mainly by families with mortgages above 12% who want to lock in lower mortgage interest rates, now down to as low as 9.5%.

Mortgage lenders say there are no national figures on the number of loans that are refinancings, as opposed to new loans, but many lenders report that half of their volume is refinancings and that that number is expected to increase. According to the Mortgage Bankers Assn. of America, there is still $95 billion of mortgage debt outstanding with interest rates above 12% that has not yet refinanced and could be expected to be in the next few months.

“If all the people who are now refinancing spent 100% of their savings, it would be a significant boost in consumer spending,” said Obrinsky. “But that’s not what is happening.”

Change Spending Habits

Instead, economists say, many people are using the savings--which average from $200 to $300 a month in some areas--to change their spending or living habits.

Interviews with 20 Washington-area families who have recently refinanced showed that one-fourth planned to use the savings in monthly mortgage payments to reduce other debts and hoped to hold down their spending in the future.

“I’ve been on a tight month-to-month schedule,” said Peter Elmer, a credit analyst with the Federal Home Loan Mortgage Corp. “The $200 a month from my refinancing will give me some breathing room, let me pay off some lines of credit and, after that, maybe use some of it to fix up the house a bit.”

Robert Andrukonis, a government architect who refinanced, said he took enough equity out of his house to pay off a home improvement loan, reducing his monthly mortgage payment by only about $80 a month, which he plans to save.

David Wyss, vice president of Data Resources Inc., an economic consulting firm in Boston, said he expects many people who have refinanced to save the extra money, particularly families that may have had to deplete savings accounts to pay for the cost of refinancing, which averages between 4% to 6% of the total loan amount.

Rebuilding ‘Nest Egg’

“The personal savings rate hit a record low in the third quarter of last year, and it now shows signs of recovering,” Wyss said. “We expect that to continue, possibly even to get a boost because of the refinancings. At least in the short term, we expect to see more saving than spending.”

Cyndy Davison said she and her husband planned to use the additional $200 a month they saved through refinancing to replenish their savings account, which was depleted by refinancing fees. Davison said points and fees on their transaction totaled $4,000 and they wanted to build up their “nest egg” again.

Out of the 20 interviewed, only three said they planned to spend the money on big-ticket consumer items economists catagorize as consumer spending, such as cars.

“With car loans relatively cheap, most people don’t need the incentive of disposable income to push them into a purchase right now,” said Kurt Brown, senior economist with Data Resources. “I think it is far more likely people will use the money to ease existing debt instead of increase debt.”

Several families said they wanted to use the money to purchase a vacation home or land in a vacation area but would have to squirrel away the savings for several years to be able to afford such a purchase.

Of those interviewed, one-third said they were comfortable with their mortgage payments and instead of reducing them had decided to increase the amount of their mortgage--by taking equity out of the house--or to switch to a shorter-term loan.

“We need more room and have wanted to build an addition,” said Jane DeMarines, public relations specialist for the Mortgage Bankers Assn. of America who is in the process of refinancing. “We decided to take the money out of the house--instead of a taking a lower monthly payment--in order to finance the addition.”

Cut Mortgage Length

DeMarines said she and her husband Ronald are refinancing a 13.375% loan to 9.5% and are planning to take out between $15,000 and $20,000 in equity from their Bethesda, Md., home. She said they plan to build a new bedroom and enclose a screened porch to make a new family room.

Two homeowners said they had chosen to reduce the length of their mortgage to 15 years from 30 instead of taking lower monthly payments. Daniel J. Opitz, a research analyst with the Treasury Department, said he opted for the 15-year loan because he wanted to get his house paid off before his children started college.

“We plan to live in this house for a long time, and since we are just starting a family now, a 15-year loan will be paid off by the time our children go off to college.”

Wyss said that reducing the term of the loan is particularly attractive to older homeowners.

“We have seen some of that, mostly from people in (their) 50s who want to pay off the mortgage before they retire,” Wyss said.

Economists said one interesting result of the refinancing wave was that it allowed some families to use the savings for life style changes they could not otherwise afford.

Barbara Andrukonis, who has had to continue working through the years that she had two children, now will be able to afford to quit her job as an analyst for an accounting firm and stay at home with her children.

“The savings from our refinance was one of the factors that helped us make the decision to have Barbara quit working,” said Andrukonis’ husband, David. “We’ll be saving about $200 a month, and it will all go straight into household spending.”

Refinancing also has allowed Georgi Barker to give up a demanding, well-paid job as an accountant for Marriott Corp. for something she has wanted to do for years: take care of children for other working mothers.

“She loves kids and did a lot of baby sitting when she was young and wanted to go back to it,” said Barker’s husband, Jim. “For the first time since we were married two years ago, this refinance has enabled us to get our finances really under control. It’s a good, secure feeling to know I can carry the mortgage with my own salary. When we have our own children, we now know that Georgi can afford to stay home with them.”

Another family said the savings from their refinancing would allow them to enroll their child in a private school, a move they had wanted to make for months.

“We are seeing that this wave of refinancing is easing finances for people and allowing them to make changes, such as trading up to a larger house or moving to a better school district or allowing mothers to switch from full- to part-time employment,” said Wyss. “It shows how the high cost of housing has pushed families into life styles they didn’t really want, and now that rates are easing, people are making changes.”