Many mortgage borrowers have interest rates well above those available in today’s market, but can’t refinance profitably. One common reason is that their property values have declined to the point where a new loan would require mortgage insurance. A second reason is that they are self-employed and cannot meet the tough income-documentation requirements that now prevail. Still a third reason is that the borrower’s credit score has either deteriorated or no longer meets the higher scores that are now required.

These borrowers face real problems for which there are no easy remedies.

Many mortgage borrowers have interest rates well above those available in today’s market, but can’t refinance profitably. One common reason is that their property values have declined to the point where a new loan would require mortgage insurance. A second reason is that they are self-employed and cannot meet the tough income-documentation requirements that now prevail. Still a third reason is that the borrower’s credit score has either deteriorated or no longer meets the higher scores that are now required.

These borrowers face real problems for which there are no easy remedies.

Yet there is another group of borrowers who can refinance profitably in today’s market, yet choose not to, for reasons that make no sense. Their barriers are self-inflicted. This article is about them.

"How long do I have to wait before I can refinance again? I was told a year."

Not so. I have never heard of a law, regulation or loan contract that establishes such a limit.

When home prices were rising, it was the practice not to reappraise a property on which the borrower had refinanced within the year. That may be where the notion of a one-year waiting period came from. You don’t hear it in today’s market, because with prices soft, lenders want a current appraisal.

Bottom line: There is no required waiting period on a refinance.

"We refinanced a year ago to a fixed-rate loan for 30 years at 6 percent. My loan officer just told me that he can give me a 5.375 percent rate with no closing costs. I’m tempted but I have already paid 11 months of the term and am reluctant to give that up."

You aren’t giving up anything. What you accomplished in the 11 months is a reduction in the loan balance equal to the 11 principal payments you made. If you refinance, it will be on this lower balance, so your savings remain intact.

It is true that if you refinance into another 30-year loan, you will be staring at 360 new payments. Lenders won’t write a loan with a term of 349 months. However, it is easy to stay on the same amortization track by making a small increase in your monthly payment.

For example, if you refinance a $100,000 balance into a new 30-year loan at 5.375 percent, your new payment is $559.98. To pay off in 349 months, increase the payment to $567.13, which I found using my calculator 2c. You might want to pay off even earlier by making the same payment at 5.375 percent that you were making at 6 percent. My calculator 2a will give you the payoff month if you do that.

Bottom line: You don’t lose past principal payments when you refinance. …CONTINUED

"I have an opportunity to refinance from 5.625 percent to 5.25 percent, but I paid $4,500 to refinance just eight months ago. If I refinance now, I will lose money on the previous refinance because the $4,500 is more than my savings over eight months. I would like to wait until my last refinance is in the black before I refinance again."

Forget about your $4,500, because it is gone. Use my calculator 3a to determine whether it pays to refinance now.

You will notice that the calculator, before it can provide an answer, must be given the interest rates on your current and new loans, and the points and other costs of the new loan. But the calculator does not ask for the costs you incurred on your previous refinance because they are irrelevant to whether you should refinance now.

Bottom line: Past refinance costs should not affect the refinance decision today.

"I have been paying on our 30-year mortgage for 10 years. Early on, most of our payment went to interest, now a lot more goes to principal. If I refinance now, won’t that mean I’ll be starting from the beginning again with most of the payment going to interest?"

Only if you take another 30-year loan. If you take a 20-year loan, and the rate is lower than the rate you are paying now on the 30, a larger portion of the payment will go to principal in month one of the new 20 than was the case in the last month of the old 30. If a 20 is not available, you can take a 30 but pay off in 20 by increasing the payment as needed. See my response above to the reader concerned about losing past payments of principal.

Bottom line: A refinance need not extend the life of your loan.

"I have been making extra payments every month, which will allow me to cut the time to complete payoff by about one-third. Isn’t that better than refinancing?"

Prepayment and refinancing should not be viewed as alternatives. Making extra payments to shorten the payoff period is something you do over a period of time, whereas a refinance is something you do at one point in time. At that point, it either pays to refinance or it doesn’t.

It is true that your prepayments may affect the profitability of a refinance. If you have paid down the balance very substantially, or expect to pay it off shortly, it may not pay to refinance. If it does pay, and you continue your extra payment plan as before, you will end up paying off sooner than if you had not refinanced.

Bottom line: A prepayment plan should not deter a profitable refinance.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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