What's Behind A Rash Of Mortgage Burnings?

While the surge in mortgage refinancings this year has captured headlines, economist Michael Carliner of the National Association of Home Builders thinks another trend may be equally significant: a growing number of people who have opted to pay off their mortgages entirely.

Census Bureau surveys indicate that from 1985 to 1989, some 5% of homeowners each year decided to pay off their mortgages so they could own their homes free and clear. That's more than the number refinancing their mortgages.

Carliner thinks the percentage of loans that have been paid off entirely has undoubtedly risen significantly in the past year. "With the average mortgage rate still around 10%," he says, "a lot of people with CDs that are earning under 4% have probably decided to liquidate their mortgages, particularly if the unamortized amount is small." In other words, someone paying 9% or 10% interest on $20,000 in mortgage debt has a strong incentive to pay off the mortgage entirely if he or she has got a similar amount in cash sitting around earning only 4%.

Because this gambit sops up liquid assets, it may crimp immediate outlays on big-ticket items. But it will also allow households to spend a lot more of their incomes in the years ahead.

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