Mortgage Refinancing

Over the past decade homeowners have had many opportunities to refinance mortgage. Even though interest rates have fluctuated somewhat, overall they have been relatively low compared to earlier decades. Since mid 2001 interest rates have declined further giving home owners additional refinancing opportunities. These drops in the mortgage interest rate provided households with a sustained opportunity to refinance to lower monthly payments or take equity out of their homes for consumption and investment.

Household wealth, in the form of home equity, has increased substantially because of house price appreciation. Many households have used their mortgage payment savings to borrow against this increased home equity. For example, households participating in mortgage refinancing converted an estimated $139 billion of home equity into cash in 2003 alone. Researchers cite a more rapid house price appreciation and the sharply rising consumer debt as reasons for the higher cash-out rate during the current refinancing wave.

Households have used the cashed-out equity to make improvements to their homes. Approximately 35 percent of cashed-out equity has been used for home improvement. Refinancing in 2003 alone helped fund approximately $100 billion in home improvements. These improvements should contribute further to the growth in home values. 

Households have also used the cashed-equity to improve their financial position. Many households have chosen to borrow more than the amount needed to pay off their old mortgage. Households have used 47 percent of their cashed-out equity to pay off high-cost consumer debt and make investments. The result is that households that refinance mortgage are in a better position to spend and save in the future.

Low-income households have historically refinanced at a slower rate than higher income households. However, since the recent drop in interest rates, households at all income levels have taken advantage of the lower interest rates to refinance their mortgages.