Re: When to refinance a mortgage?

From: "Steve Foulks" <steve_foulks@up.bresnan.net>
Subject: Re: When to refinance a mortgage?
Date: Mon, 21 Sep 1998 01:11:15 -0400

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>From: "Robert Loeser" <Robert.Loeser@medec.com>
>Subject: When to refinance a mortgage?

>     I keep watching the mortgage rates drop.  How many points below my
 >    original rate should they fall before I consider refinancing?

Unfortunately their is no simple rule of thumb that fits all scenarios.  The
basic theory is to calculate the net present value of the difference in cash
flows between the old and new mortgages and compare that with the closing
costs.  If the positive NPV from refinancing exceeds the closing costs, then
refinance.

This is the technique that calculators and financial planning programs use
but it is very crude and will give you wrong decisions depending upon what
you will do with the extra money available from refinancing.  If you are
going to simply refinance your current debt, then these programs and
calculators will do just fine.  If you told me that you planned borrow an
extra $20,000 to pay off 18% non deductible credit card debt or use the
extra cash to put money into a ROTH IRA in a stock mutual that you couldn't
do otherwise, then the decision is too complex for most refinancing
programs.  You will need to sit down with your computer spreadsheet and do a
customized solution.   First you may to learn about doing time value of
money problems.

I know most American's including myself don't like to have debt, after all
it represents a financial risk.  Why not do what bank's do - borrow as you
much as you can from them at 6.5% (pre tax) and invest the extra money in a
nice diversified portfolio of stocks (long run pre tax return of about 11%),
preferably on a tax sheltered basis.  With interest rates as low as they are
today, pay off your load as slowly as possible.  If this seems too
aggressive why not refinance the loan and use the extra cash from smaller
payments to increase your tax sheltered savings in stock mutual funds?


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