Homeowners Rush to Refinance at Low Interest Rates : * Mortgages: Some are freeing up cash for education or home improvements, while others shorten loan terms.
Elizabeth Treanor of Vienna, Va., is spending the cash from her mortgage refinancing on law school tuition and “more treats for my Dobermans.”
Jeff Francione, a life insurance underwriter, will spend $50 to $100 more a month after he refinances, but the 30-year mortgage on his Palatine, Ill., home will shrink to a 15-year loan.
Dale L. Keener of Centerville, Va., is converting his mortgage from a floating to a fixed rate and paying off his credit card bills. His goal is to get ready for college tuition bills for two children in September.
All three homeowners are part of a refinancing wave sweeping the nation, spurred by the lowest mortgage rates in nearly two decades. There are as many reasons as borrowers for refinancing and, with the increasing innovation of lenders, nearly as many ways to refinance.
No matter what the motive or method, all the refinancings are either helping the economy in the short term or improving its ability to resist ills in the future, according to economists.
“It doesn’t matter what you do with it,” said economist Richard Peach of the Mortgage Bankers Assn. of America. “It’s money you have that you didn’t have before. . . . It’s all good for the economy.”
Middle-aged couples, looking toward retirement, are shortening their mortgage terms at little or no additional monthly cost. The change builds their equity faster and saves them thousands of dollars in interest.
For example, interest on a $100,000 mortgage, at 8.5%, totals $176,800 over 30 years. Interest on a 15-year mortgage for the same amount, at 8%, totals $72,017. That’s nearly $105,000 in savings for an additional monthly payment of $187.
Younger families, planning to buy bigger houses in a few years, are taking out “5-25” and “7-23” mortgages. For the first five or seven years, they save up to a full percentage point over the rate on normal 30-year mortgages; such families hope to move before the interest rate rises for the balance of the mortgage.
Holders of adjustable-rate loans expecting to keep their homes are converting to fixed-rate mortgages. They are paying somewhat more each month in exchange for the security of a steady payment.
Mortgages tied to the one-year Treasury bill rate are adjusting to around 7% and many homeowners find it desirable to lock in the lowest fixed rates since 1973. Last week, fixed rates averaged 8.23%, according to the Federal Home Loan Mortgage Corp.
The mortgage bankers group, representing more than 2,200 savings institutions, banks, mortgage companies and other lenders, estimates 1.5 million to 1.6 million of the nation’s 60 million homeowners refinanced their mortgages last year, pumping an additional $10 billion a year into the economy.
That does not count the 11 million or so homeowners with adjustable-rate mortgages who are enjoying lower rates just because interest rates have fallen, Peach said.
And the boom is still gathering momentum. Some swamped companies have temporarily stopped lending while others take days to return calls from prospective borrowers. Refinancings at the end of December were up sixfold from March, 1990, according to the association.
More and more of those refinancing, according to anecdotal reports, are like Francione and Keener, strengthening their personal balance sheets rather than increasing their spendable income.
“I haven’t seen anyone doing anything frivolous,” said Mick Guttau, president of the Treynor State Bank in Treynor, Iowa.
Although that won’t provide any immediate boost to the economy, it should make consumers less jittery and less likely to slash their spending in any future downturn.
Nevertheless, some of those refinancing still are pumping their monthly savings into spending-- on cars, on home improvements, on education.
Economist Mark Zandi of Regional Financial Associates Inc. in West Chester, Pa., estimates that will add 0.2 percentage point to 0.6 percentage point to the nation’s gross domestic product next year. That’s not an inconsequential amount in a year when the consensus forecast among top economists is for a paltry 1.6% annual growth rate.
“It’s an important shot in the arm for consumers in 1992,” he said.
