Mortgage refinancing in 2001 and early 2002

Federal Reserve Bulletin, Dec, 2002 by Glenn Canner, Karen Dynan, Wayne Passmore

Some other reasons often cited for refinancing cannot be explored given the information in our survey. For example, homeowners sometimes refinance to change the period over which the mortgage is to be repaid. Some homeowners replace their current mortgage with a shorter-term loan, perhaps intending to have their loan paid off by the time they retire. (8) Other homeowners (for example, those having difficulty making mortgage or other payment obligations or those anticipating a reduction or disruption in income) may replace their current loan with a longer-term loan to reduce the size of their monthly payments; however, our efforts to proxy for this effect indicated that this reason was not important.

The Decision to Cash-Out

Many homeowners desire to raise funds by liquefying some of the equity in their homes. In some refinancings, the homeowner both extracts equity and lowers the interest rate on his or her mortgage. Like the decision to refinance, the decision to take cash out and the amount of cash to take out during refinancing can be statistically modeled. We again use the results from the two surveys to construct such a model.

Not surprisingly, a primary determinant of the likelihood that a homeowner will extract equity is the amount of equity in the home. Homeowners with low loan-to-value ratios were more likely to extract equity during a refinancing.

Beyond having equity to liquefy, a few other factors were important in determining the amount of cash to take out. Homeowners reporting that it is a good time to use credit were more likely to take cash out. White homeowners and homeowners with younger children were also more likely to take cash out. Homeowners who believed that they had a higher chance of losing their jobs were less likely to borrow additional money during the refinancing. However, other factors, such as age, education, and income, did not prove to be important in indicating which homeowners were more likely to extract equity during refinancing.

AGGREGATE ESTIMATES OF THE CHANGE IN MORTGAGE PAYMENTS AND THE USES OF FUNDS

This section lays out a framework for using the responses from the 2002 survey to assess the possible effects on the macroeconomy of the recent wave of home mortgage re financings. We consider separately the two ways in which a mortgage refinancing may affect a household's resources: first, by changing the stream of future mortgage payments and, second, by providing immediate cash if the household has chosen to liquefy some of its home equity. We also extrapolate from the survey responses on the uses of liquefied equity to gauge how much aggregate spending has been funded through this channel. However, the appropriate interpretations of such calculations are complicated by a variety of factors, as we discuss below.

The survey results provide information about the key determinants of mortgage payments, both before and after refinancing. Before refinancing, the outstanding balance on the average home mortgage that was refinanced between the beginning of 2001 and the middle of 2002 was $118,092. In addition, the average original contract interest rate of mortgages in this group, weighted by dollars of outstanding balance, was 8.1 percent, and the dollar-weighted average remaining maturity was twenty-two years.