Refinancing Still High at End of 2005

Refinancing in the fourth quarter of last year represented 45 percent of total loan applications. According to Frank Nothaft, Freddie Mac's chief economist, "The overwhelming majority of (these) borrowers were extracting home equity rather than trying to reduce their monthly payments.

Unfortunately, many economists think that this extraction of one-time capital from our homes is what is propping up consumer spending. The end result could be that the economy takes a bigger punch from the rise in interest rates than would be otherwise expected. This is one reason that I'm glad to see that the Federal Reserve is considering a slow and stop to the rise in interest. If the economy is going to slow down, we'd all like a soft landing, as opposed to a hard one!

In my mind, I think we'd all do better financially if we remember the parable of the ant and the grasshopper. The grasshopper "plays" all summer, while the ant works. In the fall, the grasshopper dies and the ant retires to the ant colony with reserves to take him through the winter. In other words, make sure that you have something put away for "bad" times. The whole economy doesn't have to collapse for you to have an unexpected circumstance that impacts you financially.

For that matter, an unexpected circumstance can be something good! For instance, we now have a new baby in the house. While the cost of groceries hasn't gone up per se, we are spending suddenly on things like diapers and extra laundry soap and various baby toiletries. If we'd been living at the edge of our resources, even small things like this could be an unnecessary burden. But we've always tried to live well within our means and even put a bit away.

I hope the kids appreciate it when we've got some money for their tuition saved up.


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