Debt consolidation is common among refinancers
Saturday, June 23, 2001
A startling new study says U.S. homeowners are in the process of rewriting the
traditional rules of refinancing: Rather than getting a new mortgage at a lower
interest rate, they are taking out larger loans at rates slightly higher than they were
paying before.
After a statistical analysis of recent refinancing 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 percent higher than they had before.
The study was performed by MGIC Capital Markets Group, a division of
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.
MGIC researchers say the study documents that U.S. 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, said
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 said, even though they "may
actually be taking on a higher-rate first 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 percent. Say you also have a 7.25 percent home mortgage.
Under the traditional approach to refinancing, there's not enough "spread" between
today's prevailing 7.13 percent market and your current rate to justify refinancing.
But MGIC's new 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
percent rate, you might think: Why not pay off all of it by "cashing out" some of
the appreciation our home has racked up in recent years? After all, we've got an
estimated $80,000 worth of inflation-fed equity that we can tap into through
refinancing.
Even if we have to pay 7.5 percent or 7.63 percent for a no-fee, no-closing-cost
deal on the new first mortgage, we'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 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 were opting for a higher interest rate and even a higher loan-to-home
value than they had before refinancing.
Among other findings of the study:
Nearly two out of five 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, they still have less than the 20 percent equity in the house
needed to get PMI canceled.
Fifteen percent of borrowers who weren't paying PMI before ended up with it
after refinancing.
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