The Mortgage Bankers Association has released a study that’s intended to serve as an overview for choosing between different types of mortgages and determining when to refinance.

The 58-page study, "A Financial Analysis of Consumer Mortgage Decisions," also analyzes the pros and cons of using surplus cash to pay down a mortgage or investing in Treasurys or municipal bonds.

The study makes a case that borrowers who expect to move within five years consider a 5/1 or 7/1 hybrid adjustable-rate mortgage (ARM) loan. For borrowers considering only long-term fixed-rate mortgages, the study compares 15-year and 30-year loans. Variables such as points and so-called "no-cost" loans are also explored.

Authors Andrew J. Kalotay and Qi Fu note that "sophisticated borrowers" may choose to negotiate a mix-and-match of mortgage types in a single contract — borrowing part of the contract principal as an ARM and another part as a fixed-rate loan, for example.

When it comes to refinancing, the study warns against relying on simple rules of thumb, such as "refinance as soon as mortgage rates are 50 basis points lower than my outstanding mortgage rate."

If closing costs equal 3 percent of the remaining loan principal, borrowers who refinance every time there is a 50-basis-point drop in rates may never recover their cumulative closing expenses, the study warns.

The study recommends that borrowers use the same strategies employed by corporate treasurers in deciding when to refinance or pay off debt. The gains from lowering payments today must be balanced against the loss of "option value" from refinancing too early, the study warns.

In most cases, the study said, the "borrowing horizon," or length of time a borrower expects to have a loan outstanding, is the most important consideration.

Targeted at financial planners, housing counselors and potential homeowners, the study was paid for by an MBA charitable fund, the Research Institute for Housing America (RIHA).

The National Association of Mortgage Brokers also offers advice to consumers through its Web site.


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