Some would argue that the refinancing boom is over. The record low interest rates have disappeared, thanks to the seventeen straight hikes in the prime rate by the Federal Reserve Board. Housing prices are leveling off in many markets and are even showing signs of decline in some. The average housing price actually dropped in June in San Diego County, to the absolute astonishment of every mortgage broker and realtor in California. So while the tap has not shut off, many of the economic characteristics that led to the refinancing rush are shifting to positions less favorable for refinancing in general.
At least, that is true for the serial refinancer. Many people used home refinancing as a mechanism to turn their newly cashed out equity into another real estate investment. People were snapping up no-fee mortgages and hybrid type loans on the theory that they’d be refinancing again before the loans aged to the point where they became an unattractive deal.
Real estate professionals seem to be almost universally convinced that we are going to see a deceleration in the escalation of housing values – and some think the housing markets shows all the characteristics of a bubble and will flatten out radically. In either case the era of speculative refinancing is probably over, at least for a while. If that is the case, there will be a substantial number of people who accepted refinancing mortgages that will become very expensive in a few years.
They will either find themselves paying top dollar for the equity they extracted from their home or will be selling the property and retiring the mortgage, possibly paying a penalty for closing out the mortgage prematurely. There is also a possibility for people holding those loans that they will emerge from their home sale with very little equity, if the housing market hasn’t appreciated much since they refinanced.
Hopefully the money they did take out of the house will be available for the purchase of another home. Therein lies the danger of the refinancing game. If you take the equity out of a home that has rapidly appreciated and either spend it or tie it up in some other long term investment, you may find yourself either living in a home paying on an adjustable rate mortgage with climbing rates, or selling a home and walking away with very little cash. This scenario is predicated on a housing market that cools off and interest rates that don’t retreat back to their previous – and unprecedented – lows.
Houses used to be looked upon as the premier long-term investment for many Americans. The refinancing boom turned homes into near term assets because of their rapid appreciation, changing the traditional dynamic of home ownership for a remarkable number of people. Perhaps the statistic that illustrates this best is the long-term national decline in the amount of equity homeowners own. According to the Federal Reserve, Americans, on average, own about 55% of their homes, compared with 86% in 1945. The home-equity figure has dropped 10 percentage points in the last decade.
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