Mortgage Refinancing Spurs the Economy....but for How Long?

A Home Buying Article Contributed by Elizabeth Fox-Wise

Mortgage Refinancing is a Boom to the American Economy

It has been said by economists that the increase in the numbers of homeowners refinancing their home mortgage, is the most important factor fueling the Nation's economy. Record low interest rates have driven millions of American's to mortgage refinancing. Through mortgage refinancing, homeowners have been able to realize savings which has given them more cash and more purchasing power. Many economists believe that the mortgage refinance frenzy is almost solely responsible for keeping the sluggish American economy of the 2000s afloat.

The sluggish economy is how the mortgage interest rates got so low to begin with. In an attempt to spur the economy, the Federal Government made several consecutive decreases to the Interest Rate. By lowering the interest rate, the Government was hoping to put more money into the hands of the people which would, therefore, move through the economy in the form of spending and consumption.

Based on what the economists are saying about the mortgage refinancing lending alone, not to mention first mortgages, personal loans, and other types of personal debt, it would seem that the Government's plan to spur the economy has worked. Or has it?

Is Mortgage Refinancing Really Creating Buying Power or Only Borrowed Power?

No one can argue the fact that mortgage refinancing is leaving many homeowners with more cash in their pockets to spend. But if they did a mortgage refinancing that included cash out, it has also left them with more debt to pay off.

A mortgage refinancing with cash out means that the homeowner took a new mortgage for more money than the original mortgage so that after paying off the first mortgage, there was money left over for other uses. A lot of the time, the extra cash out from a mortgage refinance is used to pay off other, higher interest debt. By doing this, the homeowner might save money from the higher interest debt savings, but if spending habits do not change, he may soon run up high interest debt again, negating any savings.

Much of the money thought to be spurring the American Economy is really only borrowed money that still must be paid back.

What Happens When Interest Rates Go up If Mortgage Refinancing is with a Variable Rate Mortgage?

Some homeowners, in an attempt to secure the lowest interest rate for their refinancing, took a variable rate mortgage. If the interest rate climbs back up, so will their mortgage interest rate. Will the mortgage refinancing have been worth it once the rate goes back up?

Furthermore, If the homeowner refinanced a mortgage with cash out, their monthly payments may have increased slightly; or the lower interest rate might have allowed them to get the cash out without seeing a monthly payment increase. But if their adjustable rate mortgage gets a rate review and the interest rate goes up, how much will the monthly payment go up and will the homeowner be able to afford it?

It is yet to be seen if the boom in mortgage refinancing was really an economical fix or an economical band aid which postponed a bleak financial forecast for awhile, but can not prevent it.