Has refinancing wave crested?

Americans know a good deal when they see it. In the past month, they've sprinted to banks at a record pace to refinance their homes, bringing down the interest cost of owning a home to a 37-year low.

Americans are using the added income to pay off credit cards, buy new cars, add a wing to the house, or just put the money under the mattress. It has added buoyancy to consumer spending at a time when the economy as a whole is stuck in the mud.

But now, that run to the bank is expected to taper off. The reason: So many Americans have taken advantage of the low, low interest rates that unless mortgage rates fall a lot further, it will no longer be worth it to head to the bank. Interest rates, in fact, are expected to tick up this year.

If Americans do slow down their mortgage refinancing, the ripple effect could go well beyond housing. "Fewer [people] refinancing means lower consumer spending," says Lyle Gramley, a former member of the Federal Reserve. "It affects a large swath of the American public."

About 40 percent of the 40 million homeowners with mortgages have refinanced their homes over the past two years, estimates Doug Duncan, chief economist for the Mortgage Bankers Association in Washington. Last year, the dollar amount for refinancing totaled $1.46 trillion - more than President Bush's original proposal for a tax cut.

Many economists thought the "refi" boom would end last year. But the economy remained weak, interest rates continued falling, and Americans kept looking for the bottom in rates.

Mr. Duncan says the cost of refinancing has dropped so much that people act very quickly to take advantage of the falling rates. It's now worthwhile to refinance if mortgage rates are about 1/2 percent lower than your existing mortgage.

For the past three years, the boom has helped the economy when it most needed it, says Richard DeKaser, chief economist at National City Bank in Cleveland. For example, after Sept. 11, when the Federal Reserve lowered interest rates, consumers responded by running out and lowering their mortgages.

Then last fall, when anxiety started to rise over the possibility of war with Iraq, interest rates fell again, and consumers jumped at the opportunity to refinance. The same thing happened last month when the actual invasion began.

"When things seem the most dark, it's been the most helpful," says Mr. DeKaser.

But some analysts see an end to the refinancing frenzy. "We are predicting it will tail off fairly rapidly, probably starting in the fourth quarter," Duncan says. "Even though interest rates will only go up about half a percentage point, it will be enough to knock most folks out of the refinance market."

Still, like any economic issue, there is a caveat. For example, if the economy were to weaken instead of strengthen later this year, the Federal Reserve Board might move to lower interest rates again. And if there were any sign of deflation (prices, wages, and output falling), the Fed would "move aggressively and try to turn it around right away," says Mr. Gramley, a senior economic adviser at Schwab Capital Markets LP.

Whatever happens in the coming months, many homeowners can already attest to how interest savings have helped. Thais Austin, for example, had a big car-repair bill to pay and was trying to figure out a way to get some extra cash. Then this month, the Austin, Texas, resident decided to act on something that had been nagging her for months: reducing her 8-1/2 percent mortgage.

"It's like free money," she says of her $500-a-month lower mortgage payment.

The story of mortgage refinancing, in fact, is almost a reflection on the way society views personal finance. Many Americans seem to consider their mortgage as if it's some kind of savings account. "People are thinking of their mortgage as another pool of savings to be tapped," says economist Mark Vitner of First Union Bank in Charlotte.

That certainly seems to be case with Richard Kiley of Fairport, N.Y. He recently refinanced his four-bedroom colonial at 5.25 percent for 15 years, down from about 7 percent for a 30-year mortgage. By paying off the house sooner, he thinks it will give him and his wife, Sarah, the chance to help their 9- and 7-year-old sons with college. Fifteen years from now, when they're spending freely, the refinancing "gives us more flexibility," says Mr. Kiley.

Mortgage bankers have also observed that many Americans have become "serial refinancers" - that is, they refinance whenever it makes sense. Take Robert Batterson of Richmond Heights, Mo. Last week, he gleefully signed the papers on his third refinancing in nine years. On his latest mortgage, he nailed down a 4.8 percent rate on a seven-year balloon mortgage (it will have to be paid off or refinanced in seven years).

"It can't get any lower than this," he says. "I figure it buys me seven years of peace of mind."