There is widespread agreement among economists and politicians today that the economy needs immediate stimulus to minimize the duration and severity of the recession that has probably already begun. In recent months, observers have frequently cited the housing sector as an important remaining pillar of strength in the consumer economy, and one that can provide additional buoyancy to household spending through the mechanism of a large-scale refinancing wave. We have already gone through one such event this year, and now seem poised to begin a second. But the widely recognized need for a timely dose of economic medicine in the form of fiscal and monetary stimulus requires that we re-examine the potential beneficial effects of another round of refinancing. In this context, we find that of the two economic benefits - rate/term refinancing to achieve cashflow savings, and cash-out refinancing to monetize home equity gains - only the latter has the potential to help the economy right away.
The long-term benefit to the economy of cashflow savings in a refinancing wave can be easily illustrated. There was a dramatic decline in the percent of income used to cover mortgage payments in the early 1990s (as rates declined into the 1992/1993 refinancing wave). Since that initial drop, the percentage has generally stayed within a range of 17% to 20% through the present time, depending on the direction and level of mortgage rates. This new lower level of mortgage debt service has allowed consumer debt to balloon from 14.2% in 1993 to 18.1% today, thereby providing one of the sources of fuel for the economic expansion of the late 1990s. The cashflow advantage of a rate/term refinancing does not necessarily provide an immediate benefit; indeed, most borrowers today still pay third-party costs (e.g., attorney fees and title insurance). As a result, most borrowers will need at least a year to reach the breakeven point, after which they will see net savings on their monthly payment.