This Is What Homeowners Did With Their Savings on Variable Mortgage Rates

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Getting an adjustable-rate mortgage can save homeowners money — but whether they actual put those funds to good use is another question.

Homeowners whose mortgage payments dropped when their adjustable-rate mortgage (ARM) reset to a lower rate increased their spending, according to a report released this week from the JPMorgan Chase Institute. On average, these borrowers’ credit card spending went up 15% relative to their baseline, which equates to around $488 per month.

Though mortgage rates have faltered in recent weeks, by and large they are way higher than a year ago thanks to the election of President Trump as markets priced in his supposedly favorable economic policies. As a result, some borrowers may be regretting their choice to spend what they saved thanks to lower rates rather than set it aside.

But homeowners with adjustable-rate loans who saved money between 2010 and 2012 didn’t just spend more once their rates went down — they also did so in advance. The researchers found that homeowners spent 9% more ahead of the anticipated drop to their mortgage payments. Altogether, these homeowners total spending increases exceeded what they saved on their mortgage payments by 4%.

It wasn’t all frivolous spending, however. Homeowners upped their spending on home improvements and health care. After the rate reset, retail expenditures also increased, said Kanav Bhagat, a director of research for the JPMorgan Chase Institute and one of the report’s co-authors. “There was definitely a larger increase in discretionary spending rather than non-discretionary spending,” Bhagat said.

These findings fall in line with behavioral economists’ expectations, per George Hofheimer, chief knowledge officer at the Filene Research Institute, a credit union and consumer think-tank. Simply put, people are inclined to spend the these savings because it’s just more fun to do, he said. “They are thinking in the short-term,” Hofheimer said. “It’s very similar to the windfall during tax season. People use that windfall for things that are ‘not good’ for their financial health.”

Today’s ARM borrowers, however, may treat the windfall they receive from their mortgage-related savings differently to those who saw their rates fluctuate between 2010 and 2012, said Mat Ishbia, president and chief executive of lender United Wholesale Mortgage. “I’d be surprised if that’s what happens in today’s market,” Ishbia said. “People are more conservative.”

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