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Mortgage Refinancing > Will Consumers Reduce Their Spending After The Mortgage Refinancing Boom?
Will Consumers Reduce Their Spending After The Mortgage Refinancing Boom? |
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The mortgage refinancing boom of the recent few years hit a high water mark sparking concerns that the increase in home equity withdrawal would weaken the financial position of consumers and over time, lead to a retrenchment in spending. But considering household assets and liabilities, the suggestion is that consumers have used the funds to restructure balance sheets and ease debt service burden. Thus households are likely to be more capable of spending in the coming years. Mortgage refinancing or repricing mortgages allows homeowners to
lower monthly mortgage payments substantially leaving them more cash for other expenses. Also in this age of rapid home price appreciation, there is growing popularity for mortgage refinancing homeowners to avail a new mortgage larger than the loan being paid off, thereby using the accumulated equity in their homes. It can safely be said that this equity leads to a net boost in consumer spending in recent years. However it is impossible to precisely estimate the extent of the boost due to the inability to observe the absence of consumer spending with home equity withdrawal. Similarly oft-quoted surveys of households for the use of funds from cash-out mortgage refinancing are difficult to decipher. If 25% of the equity by mortgage refinancing went into the purchase of a new vehicle, it is not to be assumed that the vehicle purchase would not have been possible without the equity withdrawal. More relevant is the implication of the recent spurt in equity withdrawal on consumer spending in the near future. Several analysts have predicted that once interest rates rise further ending the mortgage refinancing boom, consumer spending will undergo substantial retrenchment. This view is based on the assumption that home equity withdrawal has sparked off a significant net increase in consumer spending even as the household balance sheet pays the price. The argument by financial experts is that higher interest rates and revival of mortgage refinancing to normal standards will not lead to a sudden slow down in consumer spending rate. The basis for this view is a study of the alternatives by households of the equity withdrawn from their homes. It was found that the sharp hike in mortgage debt resulting from the increased pace of home equity withdrawal did not cause the decrease of household net worth. Instead this period of historically low mortgage interest rates had households being wise enough to use low cost, tax advantaged mortgage debt for a lot of the same purchases that they would normally have required scaling down their financial assets or with non mortgage debt. Financial experts reveal that this period of unprecedented home equity extraction has witnessed a corresponding slowing of the rate of increase in non mortgage household liabilities, increased personal saving rate and comprehensive lowering of household debt service burdens based on disposable income. In other words, they find strong evidence that the aggregate household balance sheet has not suffered due to the home equity withdrawal boom and the end of the boom did not necessarily cause a drastic slowdown in consumer spending. Additionally an important consideration is the fact that though the mortgage refinancing boom is certainly end with rising interest rates, this increase is most likely to be due to faster growth of employment, incomes and spending across the economy. Substantiating the experts in their claims was their examination of the national income accounting of mortgage refinancing to estimate the overall impact of mortgage refinancing on consumer spending. Then home equity withdrawal is focused on home equity withdrawal that the business press considers a major influence on spending in recent times. Following the assessment of the extent of home equity withdrawal, subject to the past, an investigation is conducted on the use of the withdrawn funds and speculating the probable influences on consumer spending in the coming years. The mortgage refinancing process can serve as a reminder of all that you had to endure for availing the original mortgage. The reality is that mortgage refinancing amounts to taking a new mortgage. Much of the same procedures apply, and the costs for the second time round. |
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