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Appendix of Mortgage Refinancing Advice

Description of the Selection Criteria for Search Results

Advice from Personal Finance Books
In June 2007, we sampled 15 personal finance books chosen from top-ten bestsellers lists at either the Amazon or Barnes & Noble web sites that were available on the personal finance shelves at Barnes & Noble and Borders bookstores. One Borders and two Barnes and Noble bookstores were visited in the downtown Chicago area. Of the 15 books, 13 provided a break-even calculation of some sort: specifically, they described the minimum drop in interest rate that would offset the cost of refinancing (ignoring option value considerations). While two provide this calculation as its only guideline - making no comment about waiting for extra profits - eleven other books discuss the break even calculation in addition to other rules of thumb. Seven of the books consider the effect of a lower interest rate mortgage on income tax deductions, while four include a minimum time constraint, ranging from one to five years.

Advice from Websites
To identify leading websites, in June 2007, we entered the words mortgage refinancing advice into Google and examined the top ten sites which offered information on refinancing. We conducted the search with the key terms inside quotations and also without quotations. The search for mortgage refinancing advice without quotations was more relevant in providing links to websites that provided refinancing advice as opposed to newspaper and/or academic articles, and these results are therefore reported here. Two of the sites provide a fixed interest-rate differential of one-and-a-half to two percent and recommend refinancing only if the homeowner plans to stay in the house for an additional three to five years. One of the sites provides a monthly savings refinancing calculator, while seven of the sites provide a refinancing calculator based on the break-even criterion. The remaining three sites do not provide a refinancing calculator but suggest break-even calculations.

From 15 Best-Selling Personal Finance Books

Books without a Break-Even Calculation

106 Mortgage Secrets All Homebuyers Must Learn - But Lenders Don't Tell
By Gary W. Eldred

"Dear reader, you may be able to refi profitably even if your rate drops by just .50 percent. To answer the refi question, always calculate. Never rely on rules of thumb or back of the envelope guesstimates. Compound interest can easily play tricks with casual conclusions." P. 240

"Regrettably, most Americans think in terms of low monthly payments now. As a reader of Mortgage Secrets, you know better. Whether choosing home financing or refinancing, give as much regard to equity buildup as you do the amount of the monthly payments." P. 241

"Get the loan rep to run amortization schedules for your various loan alternatives, or click on the any of the mortgage calculation Web sites and then compare the respective equity buildups. Make the loan decision with the facts in front of you. How much will that lower payment cost you in future equity?" P. 242

Mortgage Ripoffs and Money Savers: An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Fi
By Carolyn Warren

Three Guidelines

  1. "When you.re lowering your interest rate enough to make a significant difference in your monthly payment and you.re not adding more than five years to your loan...For most people, $200 a month in savings is [significant]." P. 152
  2. "When you.re significantly decreasing your loan terms. The important principle to remember is that, in loans, time is your number one enemy, not interest rates." P. 152
  3. "When you need a one-time only debt consolidation to lower your interest payments and improve cash flow." P. 152

Books with only a Break-Even Calculation

Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You
By David Reed

"This '2.00 percent rule' has been around forever it seems. It simply doesn't make sense, and quite frankly, it never did. The idea may generally work, since most consumers don't have a mortgage calculator handy or know how to calculate mortgage payments by hand. Nor do they have an idea of the closing costs associated with mortgage loans." p. 167

"But the real way to determine whether or not a refinance is worth your while is to consider both the new monthly payment and the associated closing costs that will accompany the new loan." p. 168

"Instead of [paying closing costs when refinancing] look at raising your interest rate enough to cover your closing costs. This is the 'no points, no fee' refinance that you see advertised." P. 169

"You might be able to reduce your note rate without refinancing at all."

The Total Money Makeover: A Proven Plan for Financial Fitness
By Dave Ramsey

"Total Closing Costs Divided by Savings = Number of Months to Break Even"

"Will you stay in your home longer that the number of months to break even? If so, you are a candidate for refinance." P. 194

"The best time to refinance is when you can save on interest...When refinancing, paying points or origination fees are not in your best interest." P. 192

Books with a Break-Even Calculation and a Duration Constraint

Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan
By David Reed

"The real test is how long it takes to recover your closing costs using your new lower payment compared to how long you anticipate keeping the house. So you can forget all the so-called rules of thumb. Forget the rules." P. 146

"The key to a refinance is saving mortgage interest while keeping an eye on closing costs, and at the same time anticipating how long you'll own the house." P. 147

"I think anything less than two years to recover fees is a good test, but your personal mileage will vary." P. 148

Complete Idiot's Guide to Mortgages, 2nd Edition
By Jamie Sutton and Edie Milligan

"The idea on any refinance is to know why you are refinancing and how the monthly savings will be applied. In the case of a rate/term refinance, the overall interest paid should be reduced, saving you money over the life of the loan. If you choose to do a cash-out refinance to consolidate debt, you will probably see your overall cash flow improve, saving you money."

"Again, 'savings' means different things to different households. You want to refinance only if you can foresee the benefit and recover the expense to do so within 12 to 18 months. Any longer time leaves open the question of whether the money spent to refinance will be recovered." P. 199

"It's a good idea to evaluate how this [tax] modification will affect you on tax day. Always consult with a tax professional to evaluate the impact."

Steiners Complete How to Talk Mortgage Talk
By Clyde Steiner & Shari Steiner

"When you're thinking about refinancing, and want to know what interest rate will be worth the loan paperwork hassle, evaluate the loan programs available on two crucial numbers.

The 'months to break even.' After you've refinanced, this is the number of months it will take for your savings to equal upfront closing costs.

The 'total 5 year savings.' We use a five year evaluation because that length of time most nearly matches the average family budgeting timeframe.

You may be planning to stay with this loan the full 30 years. Or you may figure you'll be moving in three. Think about your budget and substitute any number of years in the 'Total # Year Savings' line that fits for you." P. 138

Mortgage Kit
By Thomas C. Steinmetz

"Refinancing to save money is like making an investment. The cost of refinancing is the amount of your investment, and the interest you save is the return on your investment." P. 156

"The industry rule of thumb - 'refinance when you can lower your interest rates by 2 percent or more' - no longer is correct...It makes sense to refinance if you can recover your costs and make a decent return on your investment before you plan to sell your house or pay off your mortgage." P. 161

"The time necessary to recover your cost is called the payback period. Determining the length of the payback period is the crucial calculation that you must make before deciding whether to refinance." P. 161

"For most people, it would make sense to refinance with a three-year payback period." P. 164

"A shorter payback period is better. Even if you have to pay a slightly higher interest rate, choose a loan with few points over one with many points. You shorten your payback period." P. 165

"When you are shopping for a loan to refinance your current mortgage, ask lenders for a loan with no more than one point. The fewer points, the better." P. 165

Books with a Break-Even Calculation and Tax Analysis

Personal Finance for Dummies, 5th Edition
By Eric Tyson

"If you can recover the expenses of the refinance within a few years, go for it. If recovering the costs will take longer, refinancing may still make sense if you anticipate keeping the property and the mortgage that long."

"Be wary of mortgage lenders or brokers who tout how soon your refinance will pay for itself; they usually oversimplify their calculations."

The traditional break-even "estimate isn't accurate, however, because you lose some tax write-offs if your mortgage rate and payment are reduced. You can't simply look at the reduced amount of your monthly payment."

"If you want a better estimate of your likely cost savings but don't want to spend hours crunching numbers, take your tax rate, for example, 27 percent - and reduce your monthly savings on the refinance by this amount."

All about Mortgages: Insider Tips to Finance or Refinance Your Home
By Julie Garton-Good

"In most cases, it financially pays to refinance your mortgage if you can lower your interest rate and/or lessen your loan amortization period and you'll keep the property (and the loan) long enough to recoup the costs of refinancing." P. 251

"You can use an online calculator like the one found at http://www.interest.com"

"...perhaps a lesser concern, a lower-interest-rate loan will generate fewer income tax deductions come tax time." P. 253

The Pocket Mortgage Guide: 60 of the Most Important Questions and Answers About Your Home Loan - Plus Interest Amortization Tab
By Jack Guttentag

"To save money, you must stay in your house longer than the 'break-even period' - the period over which the interest savings just cover the refinance costs." P.68

"But beware! The break-even period is not the cost of the new loan divided by the reduction in the monthly mortgage payments. This widely used rule of thumb is a misapplication of the principle that when explaining something to the consumers, one should 'keep it simple.' Simple is good, except when it's wrong!" P. 68

"Among other things, the rule of thumb does not allow for the difference in how rapidly you pay off the new loan as opposed to the old one." P. 68

"The rule of thumb (dividing the upfront cost by the reduction in mortgage payment) approximates the true break-even period only if the term on your new loan is close to the unexpired term on your old loan. In other circumstances, it can lead you seriously astray." P.68

"The rule of thumb also ignores other factors that affect the break-even period. These include the time value of money, taxes, and differences in the cost of mortgage insurance between the old and new mortgage." P. 69

"...you should refinance if your total costs are lower with the new mortgage than with the current mortgage, over the period you expect to have the new mortgage. This approach is used in calculator 3a at www.mtgprofessor.com" P. 70

"So even if you are not sure how long you will have the mortgage, if you are confident that you will have it longer than the break-even period, you know the refinance pays." P. 70

Mortgages for Dummies, 2nd Edition
By Eric Tyson & Ray Brown

"In fairness, the 2-percent rule isn't utter hooey. The larger the spread between your present loan's interest rate and the new interest rate, the faster you'll recover your refinancing charges (loan origination fee, appraisal, title insurance...)" P. 169

"Because you would have less mortgage interest to deduct after refinancing, your tax write offs would be reduced accordingly. Here's a quick way to estimate the amount you would save on an after tax basis. Multiply the savings by your federal tax rate...and then subtract that lost tax savings from your pretax savings amount." P. 170

"Figure the number of month to recover those refi costs." P. 171

"Here's the magic formula to figure out how long it will take you to break even if you refinance: Refi costs / after-tax monthly savings = months to break-even" P. 171

"Whether or not you ultimately save money when you refinance depends on refi costs and after-tax monthly savings."

Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls
By Jack Guttentag

"The best way to measure the costs and gains from refinancing is to compare all costs of the existing mortgage and a new mortgage over a future period. The period should be your best guest as to how long you will have the new mortgage. If the total costs are lower with the new mortgage, you should refinance." P. 181

"... the break even period, which is the minimum length of time that the borrower must hold the new mortgage to make the refinancing pay. So if you are confident that you will have the mortgage longer than the break even period, you know the refinance pays." P. 181

"Loan officers often calculate a break-even period by dividing the cost of the loan by reduction in the monthly mortgage payment...This rule of thumb does not take account of differences in how rapidly you pay down the balance of the new loan as opposed to the old one, it does not allow for differences in the tax savings (which depend on the borrower.s tax bracket), and it ignores differences in lost interest on upfront and monthly payments. All these factors are taken into account by calculator 3a." P. 182

"The no-cost option is for borrowers who are sure to have the mortgage for no more than five years. Either they plan to sell the house within this period or they are convinced that interest rates will fall further and they will refinance again." P. 182

Keys to Mortgage Financing and Refinancing
By Jack P. Friedman & Jack C. Harris

"The costs must be considered in the decision to refinance. Any savings from the refinancing must out weigh the costs. These savings will be realized over the period you have the loan, so you must stay in the house long enough to make refinancing worthwhile." P. 49

"Of course, it does cost money to refinance the loan (see key 27). In general, it is worth considering refinancing when the current interest rate is one or more percentage points below the rate on your loan."

"Calculate the after-tax payments of both your current and new loan. You may just multiply the monthly principle by one minus your marginal tax rate...Now subtract the new payment from the old payment to find the monthly savings."

"Compare the savings to the costs to find the amount of time before you break even. This can be done several ways.

  1. Payback Method. Simply divide the costs by the savings, this gives you the number of months required to recover your investment.
  2. Discount Method. The payback method assumes that money in the future is worth as much as money now. A more realistic method uses a discount rate. This is the interest rate you could earn on money you invest. Estimate the rate (what can you earn from a bank CD) and the money you could earn each month. Use the monthly savings as the payment and the costs as the loan amount and find the term of the loan. This is your break even period."

Books with a Break-Even Calculation and Other Rules of Thumb

Mortgage Answer Book
By John J. Talamo

"Once you know the refinancing costs, it is easy to calculate how many months it will take to come out ahead. Just divide the monthly savings into the costs." P. 109

"Unfortunately, not quite that simple. If you do not pay the refinancing costs out-of-pocket, your new loan will be [increased by the amount of the closing costs]. This will raise monthly payments...If you pay the costs out of pocket, you lose the interest you could receive on the [closing costs] by putting it into a savings account. These are usually small amounts that will not affect the refinance calculations. However, if large amounts of money are involved, the importance of these factors increases greatly. If there is only a small savings by refinancing, you must consider all of the costs and savings." P 109 - 110

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Websites Resulting from a Google search for "mortgage refinancing advice"

No Break-Even Calculation

A Consumer's Guide to Mortgage Refinancing
"Refinancing can be worthwhile, but it does not make good financial sense for everyone. A general rule of thumb is that refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.

There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. (Depending on your loan amount and the particular circumstances, however, you might choose to refinance a loan that is only 1.5 percentage points higher than the current rate. You may even find you could recoup the refinancing costs in a shorter time.)"

Mortgage Refinancing Advice
"You should consider refinancing your mortgage if you can lower your current interest rate by 1.5% to 2% and plan to live in the same house for at least 3 to 5 or more years.

The advantage of consolidating your debts into your home mortgage with a refinance is that your interest payments may not only be lower, but they are also tax deductable. If you are on an adjustable rate mortgage, refinancing is also an opportunity to lock in at today's rates on a fixed rate mortgage."

Provides Break-Even Calculator

Mortgage Professor's Web Site - Mortgage Advice and Counsel
"Who This Calculator is For: Borrowers with one FRM trying to decide whether refinancing into another FRM will reduce their costs.

What This Calculator Does: This calculator compares the total cost of retaining the current FRM with the cost of refinancing into another FRM, over a specified future period. It also shows the period the new loan must be held to break even and allows upfront costs to be financed."

Move - Refinance Your Home
"This calculator will help you to decide whether or not you should refinance your current mortgage at a lower interest rate. Not only will this calculator calculate the monthly payment and net interest savings, but it will also calculate how many months it will take to break even on the closing costs."

Mortgage 101 - Should I Refinance?
"This calculator figures your monthly savings and also compares your principal balance in years with and without refinancing. Based on your total cost to refinance, a break even period is calculated in relation to your monthly savings. The time value of money and income tax deductions are not considered in this refinance calculation."

Home Mortgage Refinancing - Mortgage Refinancing Resources
"In every case of mortgage refinance, there is a certain "break even" point. This is the point, beyond which, it makes sense to refinance your mortgage. In other words, the money you save will exceed the money you pay to take on a new loan.

Mortgage refinance calculators can help you determine this break-even point by comparing your monthly savings (after refinancing) to the amount you would pay if you did not refinance. Most of these calculators also have helpful instructions and tips on when it would make sense to refinance."

"Calculators designed specifically for mortgage refinancing situation can help you answer the question, Should I refinance my mortgage? Using a refinance calculator, you can compare your current monthly payments to what those payments would be after a refinance, factoring in the costs associated with the refinancing. They also give you an idea how long you'll need to be in your home to justify those costs."

Mortgage Loan - Should You Refinance
"The Refinance Interest Savings calculator will help you to calculate what your potential interest savings could be based on refinancing your mortgage. You will be able to enter the specifics on your current mortgage and the details on what you would have if you refinanced your mortgage to see if it is beneficial for you to refinance. This calculator will also allow you to determine your break-even point if you do refinance, which is the amount of time that it will take you to recoup the closing costs that you will have to pay to refinance your mortgage."

Mortgage and Loan Calculators - Mortgage Refinance Calculator
"How long will it take to break even on a mortgage refinance? That depends on a multitude of factors. These factors include your current interest rate, the new potential rate, closing costs and how long you plan to stay in your home. Use this calculator to sort through the confusion, and determine if refinancing your mortgage is a sound financial decision."

Provides Monthly Savings Calculator

Home Loan Center - Monthly Savings & Analysis Calculator
"Refinancing can help you cut monthly payments, reduce interest costs, and have extra cash available for emergencies or important purchases."

Csi Mortgage - Mortgage Calculators
"Use our free and easy Mortgage Calculator to complete the first steps in refinancing your mortgage. Choose what works for you and start saving your hard earned cash today!"

Suggests Break-Even Calculation (Doesn't Provide Calculator)

Houses Under Fifty Thousand - Home Mortgage Refinancing a Good Idea?
"If you want to save on interest costs, it seems natural to think that you'll do just that with a lower interest rate. Often this will be true, but carefully consider the costs of the loan, including any fees and points that you'll pay. How many months will it take to save enough in interest charges to pay for these. If it takes three years, for example, before you really start saving money, be sure you plan to be in the home for that long."

The Truth About Mortgage - Rate and Term Refinance
"Although there will be closing costs associated with the new mortgage, the associated lower rate and improved terms will eventually offset these costs and benefit the borrower in the long run. Think of it this way using our example above. If a homeowner stays in their adjustable-rate mortgage at 7.689%, they will be paying $3561.01 a month in principal and interest payments. If they choose to refinance into a lower rate at say 6.5%, they'll be paying $3160.34 a month in principal and interest payments. That's a savings of $400.67 a month. Sure there may be closing costs associated with a refinance, but the savings will cover those costs quickly."

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