As interest rates have fallen in recent years thousands of homeowners have refinanced their home mortgages to lower rates. When does this make sense? And what impact does it have on household finance? NC State University economist Mike Walden answers.
“The rule of thumb on when refinancing makes sense is it makes sense when you can reduce your mortgage interest rate by two percentage points — say, going from 6 percent to 4 percent — and you are going to stay in the house for at least five years because that means you will accumulate enough savings on your mortgage to counteract the closing costs you have to incur when you do refinance.
“And a lot of people have found those rules to make sense, and they’ve gone ahead and refinanced their mortgages. Now, a big question is what are people doing with the money they save by going to a lower interest rate mortgage. And we have some new research on this, and I think it’s very, very interesting. And first the research shows they paid down on their credit card debts. So someone saving $200 a month by having a cheaper mortgage, they are taking some of that $200 and they are going and paying down on their credit card debt. That makes very good sense. And secondly if they do spend some of the savings, they are buying new cars and trucks. In fact, auto sales in localities where there has been a substantial mortgage refinancing have risen by as much as 10 percent.
“So I think the research here is saying that people do put themselves in better financial position by paying down their credit cards, but they also have some fun by going out and spending some of the savings on new vehicles.”