Some observers think the recent surge in mortgage refinancing inspired by falling interest rates could presage a significant pickup in consumer spending. But recent surveys indicate that well over 40% of homeowners refinancing 30-year mortgages are opting for 15-year loans. And that, observes economist David Resler of Nomura Securities International Inc., cuts sharply into their income available for discretionary spending.
Take the case of someone five years into a 30-year, $100,000 mortgage at 9.5%. Resler calculates that refinancing the unpaid balance with a 15-year mortgage at 7.5% would raise such a homeowner's monthly payment by about $51. But because less of the payment goes to interest, he or she owes more income tax. And at a 28% marginal tax rate, the homeowner's net aftertax payment actually rises by more than $100.
The real beneficiary, says Resler, may be the tax collector. At current interest and marginal tax rates, he estimates that each dollar of debt shortening reduces the present value of the government's subsidy to home buyers by about $7,000 for each $100,000 borrowed. And based on estimated refinancings done this year, that adds up to about $13 billion worth of extra taxes (in 1992 dollars) to be collected over the next 30 years. "In this light," says Resler, "debt refinancing is nothing if not patriotic, allowing homeowners to voluntarily increase their tax payments."