A surprising new study says that American homeowners are in the process of rewriting the traditional rules of refinancing: Rather than getting new mortgages at lower interest rates, they are taking out larger loans at rates slightly higher than they were paying before.
After a statistical analysis of recent refinance transactions in a 14-million-loan national database, mortgage market researchers report that the average borrowers in the current refinancing boom took out loans $41,000 larger and at an interest rate 0.6% higher than they had before refinancing.
The study was performed by the MGIC Capital Markets Group, a division of the Mortgage Guaranty Insurance Corp., the country's largest home loan insurer.
Included in the multi-lender database was a representative sample of conventional, FHA-VA and other mortgage refinance transactions from all regions of the country.
Although the findings may seem surprising, MGIC researchers say the study documents that American families increasingly are using home real estate equity to manage other forms of consumer debt--particularly credit cards, auto loans, department store charges and second and third mortgages.
Michael Zimmerman, MGIC vice president for mortgage banking strategies, says homeowners are using today's relatively low mortgage rates to consolidate their installment debts into a single, tax-deductible monthly payment.
They are "lowering their overall ... debt payment," he says, even though they "may actually be taking on a higher-rate first mortgage."
They are willing to do so because their bottom-line, out-of-pocket cost on the new loan is still considerably less than what they'd be paying on their combined credit card balances, auto loans and assorted other installment debts plus their prior mortgage.
Say you've got $15,000 in credit card debt, a $10,000 car loan and a $15,000 personal loan. All of that $40,000 in debt is at double-digit rates--anywhere from 12% to 18%. Say you also have a 71/4% home mortgage.
Under the traditional approach to refinancing, you'd do nothing in the current market. There's just not enough "spread" between today's prevailing 71/8% market and your current rate to justify refinancing. But MGIC's new research data suggest that you might look at your situation differently.
With $40,000 in non-tax-deductible, high-cost consumer debt at an average 15% rate, why not pay off all of it by "cashing out" some of the appreciation that your home has racked up in recent years?
After all, you've got an estimated $80,000 worth of inflation-fed equity that you can tap into through a refinancing. Why not get rid of the $40,000 in installment debt by rolling it all into a new first mortgage in the mid-7% range?
Even if you have to pay 71/2% or 75/8% for a no-fee, no-closing-cost deal on the new first mortgage, you're still going to save more than $150 a month out of pocket, and it will be all tax deductible to boot.
MGIC officials say that consolidating consumer installment debt into home mortgage debt is not what's so striking about the new refinancing data. Homeowners have been doing that with second and third mortgages and home equity credit lines since Congress prohibited interest deductions on consumer debt--but not home mortgage debt--back in 1986.
What's different today is that homeowners are rolling everything--including higher-rate home equity loans--into their first mortgage. MGIC researchers say the current refinancing boom is the first in which a substantial percentage of homeowners are opting for a higher interest rate and even a higher loan-to-home value than they had before the refinance.
Among other findings of the study:
* Nearly 2 out of 5 borrowers who had private mortgage insurance (PMI) on their loans before refinancing also have it on the replacement loan. In other words, both before and after the refinancing, they still have less than 20% equity in the house. Once borrower equity is below 20%, lenders generally insist on PMI to protect themselves against loss in the event of foreclosure.
* A number of borrowers--15%--who weren't paying PMI before refinancing ended up with it after the refinance.
Is mortgaging your house to the hilt via debt-consolidation refinancing the way to go?
The traditional advice would be to avoid heavy debt on your home because you could lose your most important asset in an economic downturn.
But the logic of looking to the monthly bottom line rather than to your post-refinancing interest rate is powerful.
If you can pay down your high-cost, nondeductible debts by paying a half percent or a three-quarters percent higher interest rate on a larger, tax-deductible first mortgage, why not?
Just don't fall behind on that monthly mortgage payment.
Distributed by the Washington Post Writers Group.