Refinance answers are available using online calculators

Posted11/24/2018 7:00 AM

Q. Should I refinance?

A. This question was posed to me recently through Quora, the question and answer website. I did not answer it there because an adequate answer in the short space Quora offers was impossible. But it made me think about why that was the case, and the result was this article.


"Should I refinance" is what I will call a "contingent question." Some other examples are:

"Should I retire?"

"Should I trade-in my car?"

"Should I marry Charles?"

Contingent questions are unanswerable without more information provided by the questioner. The interesting thing is that in my three other examples, the contingent nature of the question would generally be recognized, so that anyone posing any of these questions would include information that the questioner felt was relevant. But "Should I refinance?" was asked with no additional information provided. This probably reflects a lack of understanding that mortgage refinances have a variety of purposes, and that the success of a refinance depends on a range of factors that vary with the purpose. This article is designed as a guide.

Most borrowers contemplating the refinance of a fixed-rate mortgage want to know whether the financial gain from a lower interest rate would more than offset the refinance costs. This is less important as a motivation than it was a year ago because of the rise in rates that has since occurred. It remains relevant, however, to borrowers with older, higher-rate mortgages who for one reason or another failed to refinance when rates were at their lowest.

I have three calculators on my website directed to this question. They all measure the benefits of a rate-reduction refinance relative to the refinance costs. Calculator 3a is for borrowers who have one mortgage that will be refinanced into another mortgage. Calculator 3b is for borrowers who have both a first and a second mortgage that will be refinanced into a single new mortgage. Calculator 3c is for borrowers who have one mortgage carrying private mortgage insurance and will be refinancing into a combination first and second mortgage without mortgage insurance.

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Another reason borrowers refinance is to raise cash. While cash-out refinances are priced higher than rate-reduction refinances, this is not in itself a deterrent to the borrower who needs cash. What matters to that borrower is whether the cost of the cash-out refinance is larger or smaller than the cost of raising the same amount of cash with a second mortgage. Calculator 3d on my site is directed to this question.

Borrowers who now have an adjustable-rate mortgage (ARM) and are concerned about rising interest rates have their own reason for considering a refinance. They want to know whether the likely loss from retaining their ARM exceeds the cost of eliminating the risk by refinancing into a fixed-rate mortgage (FRM). Calculator 3e is designed to answer their question.

Some borrowers have mortgage interest rates above the current market but they can't refinance into a lower rate because their house value has depreciated. They want to know whether paying down the balance on their existing FRM in order to lower the cost of refinancing into another FRM would yield a satisfactory rate of return. These are sometimes called "cash-in refinances." My calculator (3e) is designed to answer that question.

Borrowers who are burdened with short-term debt may want to know whether it pays to consolidate such debt in a cash-out refinance. Calculator 3e is designed to answer their question. If the borrower has only one mortgage, he can use my calculator 1b. It compares the cost of consolidating the short-term debt in a new and larger first mortgage, or in a second mortgage. Calculator 1c assumes the borrower has two mortgages plus other debt, which can be consolidated with a cash-out refinance or a new second mortgage.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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