Mortgage refinancing - includes appendix on consumer attitude survey

Federal Reserve Bulletin, August, 1990 by Glenn B. Canner, Charles A. Luckett, Thomas A. Durkin

Adjustable- and Fixed-Rate Refinancing

Among the refinancing transactions studied in the survey, slightly more than 80 percent of the original loans had fixed rates (table 5), roughly the same proportion of FRMs as among all mortgages surveyed. Sixty-five percent of all refinancings involved payoff of one FRM with another FRM, and 13 percent of the cases involved a switch from an ARM to an FRM. The large number of refinancers that opted for fixed-rate financing is not surprising insofar as borrowers tend to refinance when rates are perceived as low, and the inclination is to lock in low rates with fixed-rate loans. Still, 17 percent of those who refinanced switched from a fixed-rate loan to an adjustable one. These "fixed-to-adjustable" refinancers seemed to divide into two main groups. About half had relatively small balances remaining on their original mortgages, oftenwith a very low interest rate, and they borrowed substantial amounts of new funds. In these cases, the primary objective was clearly to raise new funds. Refinancing an existing mortgage was apparently the cheapest way to do it, notwithstanding the sacrifice of the low rate on the old balance. The other half refinanced fairly large balances, in most cases with cost reduction as a key objective. Many of these refinancers were apparently attracted by big initial rate discounts: Their refinancings were generally recent (in 1986 or later), and the initial rate after the refinancing was substantially below the current rate, although interest rates generally have not risen much since 1986. Interestingly, the current rate in most of these cases was still at least somewhat below the rate on the original fixed-rate loan.

Amount Borrowed When Liquidizing Equity

On average, consumers who liquidize equity during refinancings borrow about 25 percent of their accumulated equity. For some refinancers, the amount of extra funds borrowed can be quite large. For those who borrowed additional funds during refinancings between 1986 and September 1989, 15 percent obtained more than $25,000 (table 6). The mean and median amonts of extra funds borrowed were $25,145 and $15,941 respectively. These amounts were about the same as for homeowners who borrowed through traditional home equity loans during a similar time period. The mean and median for the latter were $22,534 and $15,905 respectively.

Regional Pattern of Equity Extraction

As noted above, nationwide, nearly 60 percent of those who refinanced their first mortgage liquidized some equity (table 7). The sample size is too small to draw strong conclusions about regional patterns, but the limited evidence suggests that borrowing additional funds through refinancing may have been more common in the Western and Northeastern regions of the country. If so, this regional pattern would be similar to the one that holds for the use of home equty credit: The proportion of mortgage debt holders with a home equity loan in the Northeast is more than twice that pertaining in the South or in the North Central region. Use of home equity loans is also higher in the West thatn in these latter two regions, although by a much smaller margin.