A good bit of advice on the Web suggests the decision is simple: find a rate that is one percent lower than your current rate and you're good to go. Most of these sites are in the business of making loans, and their calculators usually encourage you to go ahead.
A more-sophisticated calculation of the merits of refinancing would include other factors: the borrower's tax rate, inflation expectations, how long the borrower plans to live in the house, the opportunity cost of paying closing costs rather than investing in stocks or bonds, and so on, The Wall Street Journal reports.
There are, to be sure, plenty of websites whose advice is unbiased and sound. The Federal Reserve, for example, offers a refinance resource page on its website that includes a better break-even calculator with tax-rate considerations.
One obscure calculator comes close. Instead of plugging in today's mortgage rates and determining how long it would take to pay back the closing costs, it uses "optimization theory" to conjure up a person's ideal refinance rate regardless of where rates are now. If you can find a rate that is equal to that rate or lower, it's time to refinance.
The calculator, posted on the National Bureau of Economic Research's website at http://zwicke.nber.org/refinance/index.py, is based on a 2008 paper by two economists at the Federal Reserve and one from Harvard University. Using stochastic calculus, they devised a formula based on the loan size, the homeowner's marginal tax rate, the expected inflation rate over the life of a loan, how long the borrower plans to remain in the house and other factors.
The Optimal Refinance Calculator spits out tougher numbers than many other calculators in part because it factors in the benefit of waiting beyond the break-even for the chance that rates could fall further. Refinance now and you reduce your ability to refinance later.
No comments:
Post a Comment