Statistics About Homea Loan Refinancing

Refinancing can result in a lower interest rate and a reduction in monthly mortgage payments allowing homeowners greater flexibility in financial budgeting. Deciding how and when to refinance a home mortgage requires careful evaluation of costs and benefits. Statistics summarizing refinancing activity such as changes in terms and conditions of mortgages after refinancing, the amount of funds homeowners raised, the ways in which homeowners used the funds, and the amount of home equity liquefied during refinancing are useful in evaluating personal decisions to refinance.

How often do people refinance?

In 2002, roughly 63% of United States homeowners had an outstanding mortgage on their primary residence and owed an average of $100,000. Home mortgage debt is commonly incurred for two reasons:

1.Most homeowners desire to borrow funds in order to finance the purchase of a home.

2.Homeowners sometimes borrow against the accumulated equity in their homes to obtain funds to buy goods and services, to repay other debts, or to finance the purchase of financial assets.

Roughly half of the homeowners with mortgages refinance their homes at least once after purchase. Mortgage refinancing has become a widespread practice because of a combination of factors such as:

1. Lower interest rates
2. The adoption of new technologies that have reduced mortgage transaction costs
3. Gains in home values and equity
4. The reduction in the prevalence of mortgage prepayment penalties

Why do people refinance?

Homeowners have numerous reasons for refinancing their mortgages. These include:

1. Obtaining a lower interest rate 2. Changing the terms of their loan (such as converting from an adjustable-rate to a fixed-rate mortgage) 3. Liquefying equity

The likelihood that equity would be liquefied during refinancing differs between those refinancing with a fixed-rate and those refinancing with an adjustable-rate mortgage. Among those taking out an adjustable-rate mortgage, 57% extracted equity, whereas of those selecting a fixed-rate mortgage, only 44% borrowed additional funds. Homeowners seeking an adjustable rate mortgage by refinancing spent a greater share of the funds for home improvement, suggesting that they chose an adjustable-rate mortgage either because they desired a lower payment in the short-term or because they might be fixing up their home in anticipation of selling.

After refinancing, about 74% of homeowners had mortgages with a longer maturity in 2002, mainly because those opting for refinancing chose thirty-year mortgages. Additionally, the term of their mortgage lengthened about six years on average. In contrast, 17% of homeowners had mortgages with a shorter maturity, most chose fifteen-year mortgages, and shortened their maturity by an average of 7.5 years.

How are borrowed funds used?

Equity liquefied by refinancing is used in various ways, including:

1. Funding home improvements 2. Paying down other debts 3. Changing the mix of a household's assets

For homeowners who refinanced in 2001 and the first half of 2002, the most common use of funds was by those who took out cash in order to repay debts. Paying for home improvements was the second most common followed by consumer expenditures, vehicle purchases, vacations, education, and medical expenses. Financial investments were cited less frequently as well as real estate, business investment, and tax payments.

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