Is Mortgage Refinancing a Loser’s Game?

The reason home owners are missing out is simple: <bBanks don't want to do it. I have seen documentation of a home owner who on various occasions was told by Wells Fargo that she earns too money to qualify, earns too little to qualify, and only could qualify if she had missed some credit card payments (not legally factual).

What is factual is that Wells Fargo doesn’t want that kind of business and so makes thousands of home owners jump through hoops, only to be disappointed. This is cruel punishment for people who already are punished by poverty, but the banks don’t care about such things, so long as the bonuses aren’t reduced.

By the way, I’ve mentioned this to both our Senators and our Representative, but their concern is reelection, not aiding one-vote constituents.

Rodger Malcolm Mitchell

You forgot one item on your analysis. The tax savings on the interest paid. It is probably around $70,000 for most average tax payers!
What should the mortgage industry have done to comply with Congress desire to get more people in homes? They should have created a participating mortgage for primary residences. A 30 to 40 year fixed mortgage at 2 to 4% with 10 to 30% participation upon refinance, sale, gift or inheritance. The borrowers would be able to stay in their homes and the banks (or mortgage holders) would probably make more in the long run in appreciation. This is a mortgage that works unlike the sub prime which does not! They do it for the big boys-why not everybody! Mark S. Pash CFP, economonicsfordemocrats.com

Correction: Too much money to qualify and toolittle money to qualify.

The tax deduction for mortgage interest is overrated. You really only get the % over the standard deduction your mortgage interest takes you. A lot of homeowners I know tend to take the standard deduction anyway, meaning the mortgage interest deduction did bupkis.

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First of all, the average life of a mortgage in this country (at least until the current mess) is seven years. Very few people pay off their mortgages over thirty years. They are more interested in cash flow.
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Secondly, with a little careful planning, a borrower who sincerely believes he/she will pay off their mortgage can save money and interest if their new rate (in relationship to their old rate) is low enough and they choose a term that is shorter than the remaining term on their old loan. Mortgage loans can be written for ten, fifteen, twenty, twenty-five, thirty, and now even forty years, depending on a borrower’s needs. Interest rates for shorter-term loans are also generally 12.5 to 25 basis points lower, too.
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Thirdly, the idea of a “participation loan” likely wouldn’t work because, as has been noted often, most mortgages are packaged and sold on the secondary market. The securitization process doesn’t really allow that type of investment return.

I really think this is the reason we are all in this housing mess. We put things in too simple of terms for something as huge as a mortgage. You cannot conclude that Refinancing is a loser’s game in 2 paragraphs. There are way too many factors, such as how long you plan to live there, what is the total cost of the new loan, when is your break-even point, and any person thinking about doing a refinance needs to think through those factors before making such a big decision.

You are very correct that mortgages are complex. And the mortgage industry is partially responsible for the mess, but not necessarily in the ways media coverage have described.
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One thing that helped create this problem is the “commodization” of mortgages over the past dozen years or so. Years ago, mortgage shoppers generally shopped for a mortgage through word-of-mouth recommendations by friends, real estate agents, etc. There was more one-on-one contact and loan originators (at least the smart ones) looked at the borrower as a life-long customer who, if treated well, would not only continue to do business with them, but also recommend them to others. Increasingly with the influence of the Internet growing, people came to believe that obtaining a mortgage was all about “rate”, not service, product knowledge, etc.
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Another contributor to the problem was Congress’s refusal to raise loan limits on FHA and VA loan guarantees to reflect market realities, especially in high-cost states like California. These loan programs were the original “sub prime” loans, but with far better underwriting due-diligence. By keeping the loan limits artificially low the door was opened for creative securitizers to step in & take over the market.

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You say, “Let’s say you take out a $300,000 mortgage to buy a home. Assuming it’s a 6% fixed-rate 30-year mortgage you’ll wind up having paid $236,000 in interest by the half way point (15 years) but you’ll only have paid off $86,850 of your mortgage balance—that’s almost a 3-to-1 ratio of interest to principal.”

With your example above, you have inadvertently found the heart of the financial crisis.

The fractional-reserve monetary system, used by the US to create 99.9% of our nation’s money supply, creates only the principal of these loans. Since no one creates additional money to pay the interest, fulfilling the loan contracts is impossible, when they are viewed as an aggregate whole. If you repay the principal, there is no money to pay the interest; if you pay the interest from the money supply, there is insufficient money to repay the loans. In either case, fulfilling the loans in their aggregate is impossible.

The banking system must continually increase the total debt in the economy by originating new and larger loans, using the newly created money to service older loans, diluting the currency in the process, and operating like any ordinary pyramid scheme found in the investment world. then, reasoning from your example, the fractional-reserve monetary system is a simple Ponzi Scheme operating on an astronomical scale.

I wrote about this in considerably more detail on HSH.com. You can see exactly how refinancing affects your equity position (and what to do about it) here. http://library.hsh.com/read_article-hsh.asp?row_id=1333

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[...] The Wall Street Journal ran a big story on Wednesday about how homeowners are missing out on big savings because people can’t qualify for mortgage refinancings.  This sounds like a tragic twist in what has been a humdinger of a bear housing market. But the more you understand mortgages, the more this bad news looks to be a blessing in disguise.  To wit, the way fixed-rate mortgages are structured  the lion’s share of your first decade’s payments are for interest payments, not to build home equity. Each time you refinance you reset the clock to zero, starting the interest-heavy period all over again. With the average homeowner mortgage lasting well less than 10 years before it is refinanced or paid off, it’s no wonder Americans are so lacking in home equity. I don’t mean to be insensitive to financially troubled homeowners who desperately need a break in their monthly payments, I’m just pointing out that there’s a big hidden cost to refinancing. Full story is available on The Curious Capitalist [...]

I am not sure of your premise that the interest clock resets to zero when you refinance.

Using your example, if you mortgaged $300,000 for 30 years at 6%, your monthly payments would be $1,799. In the first month of year 1, that payment would consist of $299 in principal and $1,500 in interest. By the time you reach the first month of year 16 (the halfway point), the payment would consist of $733 in principal and $1,066 in interest.

Let’s say, you refinance the remaining $213,147 balance at that point with another bank. For example’s sake, if your new loan is for 15 years at the same 6%, your monthly payment would still be $1,799. During the first month of year 1 of the new loan (year 16 of the old loan), that payment would consist of $733 in principal and $1,066 in interest, the same as before.

The only reason there would be an “interest clock reset” effect is if you refinance for a longer term than is remaining on your original loan. So if you can refinance at a cheaper rate for the same term, you will likely save money.

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When armies are mobilized and issues are joined,
The man who is sorry over the fact will win.

- Lao Tzu -

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[...] Curran for Time yesterday published Is Mortgage Refinancing a Loser’s Game? He makes a great point that I think many may miss. To wit, the way fixed-rate mortgages are [...]

Duh…the answer is simple: suck it up and get both a lower rate and change the term to 15 years, building equity much faster and saving a massive amount in interest.

[...] Is Mortgage Refinancing a Loser’s Game? – The Curious Capitalist – TIME.com [...]

Forgot to mention Alternative Use of Money and Inflation besides potential tax saves. If you rec’d a fixed thirty year mortgage in 1970, your were a big winner! It became asset as you paid it back with inflated dollars. Is this the case today? Who knows! Maybe! Also, if your cost of a mortgage is 5% can you invest in something that gives you a higher return. As long as you can afford the after tax payments. Yes, I know it is increased risk! One gets wealthier by taking risk. If you are going to have, need or afford debt for cars and other purchases or investing, the long term 30 year fixed home mortgage is usually the best type to have.
Mark S. Pash CFP

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