After Americans refinance, they renovate

Ed Garcia is ready to take a plunge.

Two weeks ago, he refinanced his mortgage, lowering his interest rate from about 9 percent to 7 percent. With the $250 a month he saved, the Key West lab technician plans to put in an in-ground pool to help his family survive south Florida's scorching summers.

Heidi Perry, a payroll manager from Middleborough, Mass., also has her eye on some home improvements. She plans to install vinyl siding and replace the windows on a rental property when she refinances later this year.

They are part of a wave of homeowners who will refinance their mortgages to the tune of $600 billion by the end of the year - a number just shy of the all-time annual record set in 1998. It's a phenomenon in which homeowners keep watch on every meeting of the Federal Reserve (the next is May 15), in hopes that new interest-rate cuts will provide yet another reason to refinance.

While there's some concern that borrowers are dipping too deeply into the equity of their homes, economists say that the money people have taken out of their houses and poured back into the US economy has strengthened it overall.

"Refinancing becomes part of the shoring up and undergirding of the economy," says Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University in Cambridge, Mass. During previous economic slowdowns, he says, it was quite the reverse. "In the past three or four recessions ... it's the housing market that fell first" and took the economy down with it.

As easy as picking up the phone

Part of the change this time around, Mr. Retsinas says, is that mortgage bankers have made it much cheaper and easier for consumers to refinance - with some waiving origination fees and closing costs. In the past, it would take a rate cut of 2 percentage points before many homeowners considered it worth the paperwork and expense. Today, a drop of half a percent sends people scurrying for the phones.

Another reason is that home values have risen during the past three years, so people have more equity that they can tap into. "It's a pretty doggone easy place to get money," says John Gillett, head of Barrington Mortgage in Illinois.

Apparently, homeowners agree. Some 50 percent of people who refinanced during the first quarter of 2001 took out more money than their original mortgage, according to a survey by mortgage giant Freddie Mac released last week. And while, as Mr. Gillett says, "there are as many reasons as there are people" for needing extra cash, two of the most common appear to be paying off credit cards and fixing up the house. While getting a lower payment is the primary reason Americans are refinancing, according to a recent survey by MortgageIT Inc., home improvement was the No. 1 reason people were applying for "cash out" refinances. Consolidating debt ranked second.

Wally Ranck hopes to do both. The Barrington condo-owner saw refinancing as a way to tell credit-card companies to "go away." With the money left over, he plans to replace a few windows. "Nothing too exciting," says the sales manager.

Those improvements aren't just sprucing up an individual home, says Robert Irwin, an author with 30 years in the mortgage business. Cumulatively, they're improving the US housing stock. "In southern California, you can't go down any block without seeing two or three homes being renovated.... Ten years ago, people wouldn't put 10 cents into their homes because of the real-estate recession," says Mr. Irwin. "We're learning what Europe learned a long time ago. You ... build for the long term."

Part of that realization may be due to the fact that, in many areas, there's simply no room left to build. That's true in some Massachusetts suburbs, says John Swann, owner of Centrum Mortgage in Hingham, Mass. That has sent home prices skyrocketing and inspired a number of people to stay put. "Say a guy living in Needham could sell his home for $550,000 to $600,000. He might need $800,000 to buy a new one. Rather than do that, people are upgrading their [current residences]."

And by employing plumbers, roofers, and, in Garcia's case, pool men, fixer-uppers are doing their bit to help the country. "It means more work for contractors, more appliances bought - a whole series of expenditures," says Retsinas.

Risks involved

But he's less sanguine about people shifting their credit-card debt over to their mortgage. Many states have laws that protect debtors from losing their homes if they can't pay their credit-card bill. Not so, the mortgage payment.

Steven Schnall, president of The New York Mortgage Co., is also concerned, particularly about homeowners who have taken out 100 percent or even 125 percent of the value of their homes. "Should the housing market soften and values start declining," which he's already seeing, "people will face upside-down equity." In the past, he says, that's proven dangerous - causing a lot of foreclosures. "People taking cash out when values are very, very high creates an extra element of risk, not only for homeowners but for the economy as well," Mr. Schnall says.

While refinancing is hardly a new concept, "it's the scale of it that's new," says Retsinas. There's also been a shift in the uses to which people put the money. Very few people take out money to buy a car anymore. And during the last refinancing boom in 1998, people would pull money out of their homes to pour into the stock market. That's not happening nearly as often today.

"In 1998, they'd leverage the house as much as they could. People wanted to borrow 80 percent or 90 percent of the value, all to keep investing in the market," says Greg Gwizdz, senior vice president for Wells Fargo Home Mortgage.

Many brokers say a certain number of people are refinancing to buy that vacation home by the lake they've always dreamed of or to take a fancy vacation. And then there was a recent customer of Meriwest Mortgage. "We had one guy who took $300,000 in cash out of his home to pay off his airplane," says Jack Buckman, president.

(c) Copyright 2001. The Christian Science Monitor