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Assess The Effect Of Mortgage Refinancing On Consumers Expenses |
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With the boom in mortgage financing hitting a peak in recent years, an increasing apprehension over the surge in home equity withdrawal has put consumers in a vulnerable financial position resulting in spending retrenchment. However, household assets and liabilities indicate consumers having used withdrawn funds in restructuring balance sheets and reducing debt service burden. Consequently households are in a more favorable position to spend in the future. Mortgage refinancing or re-pricing mortgages help homeowners to substantially reduce their monthly mortgage payments, leaving more cash for other needs. Also there is an increasing likelihood, especially with current rapid home price appreciation, for mortgage refinancing homeowners to avail a new mortgage for an amount greater than the loan being paid off, thereby availing the accumulated equity in their home. It can safely be concluded that due to this, consumer spending has received a fillip recently. However it may prove impossible to precisely deduce the extent of this boost, as it is not possible to know what consumer spending would have been without the home equity withdrawal. Commonly quoted surveys where households cite the purposes for using funds from cash-out mortgage refinancing may pose difficulty in interpreting for the very same reason. For example, the mere fact that 25% of the equity withdrawn through mortgage refinancing for a new car purchase does not necessarily imply that without having withdrawn the equity, it would have been impossible for the homeowner to purchase the car. What is more pressing is the implication of the recent flush in equity withdrawal for the consumer preparing to spend. Several experts are of the view that with the rise in interest rates and the end of the mortgage refinancing boom, consumer spending will be considerably retrenched. This view takes into account the belief that the trend of home equity withdrawal has given rise to a significant net increase in consumer spending even as the household balance sheet is depleted. The argument from financial experts is that higher interest rates and with mortgage refinancing reverting back to normal levels, it is unlikely that there will be a sudden slow down in the growth rate of consumer spending. Their opinion is on the basis of the findings about the use of the withdrawn equity by the households. It was found that the sharp increase in mortgage debt arising from the increased frequency of home equity withdrawals does not necessarily a precursor to household net worth decline. Instead historic low mortgage interest rates have led households to be sensible enough to use low cost, tax advantaged mortgage debt to make most purchases that would have required drawing down financial assets or incurring non mortgage debt. This is the period of unprecedented extraction of home equity that financial experts found to have a simultaneous slowdown in the rate of increase of non-mortgage household liabilities, increased rate of personal savings and lowering of comprehensive household debt service burden relative to disposable income. Therefore the evidence is sufficient that the aggregate household balance sheet has not suffered at the cost of home equity withdrawal boom, and the conclusion of the boom may not result in slowing down consumer spending. Also it needs to be remembered that though it is inevitable that the boom in mortgage refinancing ends with rising interest rates, the increased rates will be more likely to be influenced by faster growth in employment, income and spending across the economy. The view of the experts is substantiated by the national income accounting of mortgage refinancing to measure the overall impact of mortgage refinancing on consumer spending. The business press has reported a significant increase in spending due to home equity withdrawal in recent times. Having assessed the extent of home equity withdrawal in recent years compared to the past, an investigation is conducted into the use of the withdrawn funds by households and the possibilities in consumer spending in the immediate future. The mortgage refinancing process can be a reminder of the process of the original mortgage. The reality of mortgage refinancing is simply a new mortgage. Many procedures will be the same apart from the costs in the second. |
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