Remodeling the debt

Mortgage interest rates are near the lowest they've been in more than 30 years, and many consumers are scurrying to refinance their homes.

But what are they using the extra money for? Paying down debt, increasing savings or going on shopping sprees?

Nearly a third of homeowners who refinanced their mortgages in the last two years or who plan to do so say they'll use the money to increase their savings, according to a nationwide survey by New York based Cambridge Consumer Credit Index. Twenty-three percent plan to pay off debt such as car loans or college loans. Only 15 percent plan to pay off credit card debt, while 20 percent will use the savings to remodel. The poll of 1,000 adults found that 24 percent have refinanced and 16 percent plan to do so within a year.

In San Antonio, many local mortgage brokers are finding that consumers are reducing their debt through refinancing, but are not decreasing their payments, said Erin Stark, a loan officer with Professional Mortgage Services.

Stark said her office has been busy refinancing loans, but homeowners are looking for shorter terms rather than lower payments.

She said borrowers are reluctant to increase mortgage principals because of job instability and rising taxes.

The Mortgage Bankers Association of America reported for the week ending Oct. 23, the Refinance Index decreased to 5588.7 from 6793.8 the previous week. The Refinance Index is the best overall gauge of mortgage refinancing activity and includes all conventional and government refinances.

However, last week marked the 13th consecutive week that the Refinance Index has been above 4000. Just two weeks ago, it reached a high of 6926.9.

Refinancing activity for the week of Oct. 23 represented 73.4 percent of total applications, decreasing from 78.0 percent the previous week.

San Antonio residents Jim and Patricia Booth said they recently refinanced their mortgage to ensure financial stability in their retirement. The two baby boomers cut their 30-year mortgage to a 15-year term, shaved off their monthly payment and saved ,000 in interest.

Though they had to pay about ,000 in fees, the Booths say the expense is worth it because they won't have to worry about paying for their mortgage beyond 15 years.

"Someone my age should look into setting themselves up for retirement (early) and not have to worry about it when you retire," Jim Booth said. "You don't know what's going to happen 15 years from now, and it's good to think ahead to prepare for later."

According to the Mortgage Association, San Antonians deciding to refinance now can expect favorable terms, since interest rates are expected to remain low for most of next year due to the sluggish economy.

John Quillen, manager of Security Service Credit Union's mortgage department, said refinances represent 80 percent of the loans the credit union processes.

He too said clients are opting for shorter terms, but they're still cautious. Many roll their mortgage fees into the loan instead of coming up with the cash.

"Most people like to walk out without writing a check," Quillen said.

Reducing a 30-year loan to a 15-year loan is like creating a fixed savings account, said Tony Tylman, vice president of Cornerstone Mortgage Co. in San Antonio.

Tylman said it's one of the quickest ways to accumulate wealth, as long as the borrower keeps credit-card debt at zero, maintains a three-month cash reserve and maximizes contributions to his or her 401(k).

Related links:

1. Serial refinancers ride falling rates again and again
2. Refinancing Warning Issued On 'Churning'
3. The siren song of low mortgage rates and a broad need for liquidity push many homeowners into 'cash-out' deals worth more than their original loans. Wise move?