Refinancing transitions and equity extraction among CRA mortgage borrowers

Abstract

Refinancing transitions can alter both the long-term cost and the sustainability of a homeownership tenure. However, because few datasets allow researchers to follow homeowners from one mortgage to the next, little research exists regarding the extent and nature of refinancing transitions. This article uses uniquely rich data from the Community Advantage Program (CAP) to examine the refinancing decisions of a sample of low-income borrowers with 30-year fixed-rate purchase mortgages. While the majority of refinancing CAP borrowers secured lower-cost prime loans, a minority refinanced into adjustable-rate mortgages and into products with above-prime interest rates. The empirical analysis documents the refinancing transitions made by CAP borrowers and explores the role of equity extraction in the refinancing decision. Refinancing motivated by a desire to secure a lower interest rate is shown to be substantively distinct from refinancing that includes equity extraction. This difference carries over into borrowers’ selection of refinancing products, as borrowers who extract equity transition more frequently into non-prime FRM and ARM products than borrowers that rate refinance.