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Interest-ing strategies

National | Homeowners refinance at higher rates; professors link weather with stock prices; and education is more important than ever in the job market

Issue: "Schundler's bliss," July 7, 2001

The rise of the mega-mortgage
Refinancing a mortgage loan used to mean signing for a smaller loan at a lower interest rate, yielding a smaller payment. But an analysis of a 14-million loan mortgage database by MGIC Capital Markets Group showed that many homeowners refinancing today are increasing their original loan balances-at interest rates slightly higher than what they were paying before. MGIC researchers reported that during the latest refinance wave-spurred by the Fed's slashing of interest rates-borrowers increased their mortgage loans by an average of $41,000 at rates that were 0.6 percent higher than those on the loan refinanced. The strategy is an old one: Using a house note to manage other forms of higher-interest, non-tax-deductible consumer debt. Still more homeowners are climbing on the debt-consolidation bandwagon. While in 1993 about eight in 10 borrowers sought to lower mortgage payments, MGIC vice president Michael Zimmerman estimates that consolidation motivates about half of today's refinancers. Another difference: Borrowers now are more likely to roll all their debt-home equity loans, credit cards, auto loans-into a single mega-mortgage. Is this a good practice? That depends. The strategy can lower monthly out-of-pocket payments and turn previously nondeductible interest paid into a hefty tax write-off. The danger comes when the new mortgage loan is signed and revolving consumer debt is erased: Will borrowers who needed to roll several debts into one to save money now be able to resist the temptation to charge up freshly cleared credit limits all over again? The traditional advice, writes nationally syndicated real-estate columnist Kenneth Harney, would be to avoid heavy debt on a home, because homeowners carrying high mortgage balances stand to lose their most important asset in an economic downturn. But for those already juggling high-interest, nondeductible consumer debt, a minor interest-rate hike on a refinanced first mortgage can, when properly managed, make long-run financial sense. Middle Earth investing
Trading on Wall Street? You may want to check the Weather Channel before you buy or sell. A new study conducted by finance professors at Ohio State University (OSU) and the University of Michigan links morning sunshine at 26 leading stock exchange sites-including the New York Stock Exchange-to positive market returns. OSU's David Hirshleifer and Michigan's Tyler Shumway examined daily returns (alongside weather data) at the leading stock exchanges in each of 26 countries from 1982 to 1997. For each trading day during that 16-year period, they studied cloud-cover data, using weather statistics from the U.S. National Climatic Data Center. The results: The daily difference in market returns on sunny days was nine basis points higher than returns on cloudy days. That's a relatively small daily variation, Mr. Hirshleifer said, but he pointed out that when annualized, the difference is significant: Sunny-day trading yielded 24.8 percent more per year than trading executed under overcast skies. "There's a great deal of evidence from psychology that sunshine helps put people in a good mood, and people in good moods make more optimistic choices and judgments," said Mr. Hirshleifer. Jeff Hirsch of the Stock Traders' Almanac told Reuters: "I have come across some stuff that is just as esoteric.... It's interesting, but I kind of find it like reading Tolkien and the Lord of the Rings." But the study, which took into account seasonal variations in sunshine in all 26 cities, as well as the effects of other weather conditions such as rain and snow, has been conditionally accepted for publication in the peer-reviewed Journal of Finance. Growing by degree
During the next seven years, higher education will be more important than ever to people changing jobs or preparing for careers, according to the U.S. Bureau of Labor Statistics. The agency's most recent analysis of employment growth revealed that the number of jobs requiring associate degrees and higher will grow between 20 and 31 percent by the year 2008, while those requiring only on-the-job training or related work experience will grow just 7 to 14 percent. Employment in occupations requiring an associate degree is projected to increase 31 percent, faster than any other occupational group categorized by education and training. Although occupations requiring only on-the-job training will account for two-thirds of approximately 55 million jobs available in 2008, many of these jobs will offer low pay and benefits. "Education is essential in getting a high-paying job," the BLS report said. "All but a few of the 50 highest paying occupations require a college degree."

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