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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: c.hinton who wrote (263123)	4/30/2008 3:57:53 PM
From: TimF	Read Replies (1) \| Respond to of 281500

I agree their more qualified to make an analysis, they understand the facts better, and they have more experience in the field. But the summary of the piece is missing some crucial logic. The premises laid out in the summary don't support their conclusion. It might in the body of the report, but if so they did a poor job on the summary. As far as the last point you raised, if you assume a constant rate of inflation 1 - You aren't assuming something that's likely to happen in the real world, and 2 - You don't necessarily get constant real or nominal interest rates. More importantly if you no change in inflation AND no change in interest rates, than the fact that people might not be able to get a lower interest rate for a refi, but to the extent this happens and causes a reduction in refinancing, its the lack of opportunities for favorable refinancing that reduces refinancing not the fact that the real cost of a payment on a fixed loan goes down over time. There whole idea seems to be premised on the idea that homeowners who wish to refinance in order to extract equity, face a hidden cost from inflation increasing the cost of loan payments after a refi. But if, inflation is assumed to be constant, than inflation doesn't impose any such hidden cost (and even if inflation and interest rates climbed the cost wouldn't really be hidden). They are right that the effective cost for a fixed mortgage payment decreases over time. The amount you owe on the mortgage gets deflated away over time. A cash out refinance is essentially refinancing this deflated debt at the same level, combined with taking an additional loan. (Yes both "loans" are combined in the same loan but this loan has two aspects that are worth considering separately). The refinance of the same amount at the same interest rate, imposes no costs other than the actual closing costs of any refinance. The additional borrowed money would require additional interest, but that would be the case however you refinance the loan and the additional interest would in no way be hidden. It would only be a hidden cost, if the payments on the initially owed amount would go up. The reality is that given constant interest rates the payments on the initially owed amount would be likely to go DOWN after a refinance because the term would likely be longer (take 30 year loan, 4 years later get another 30 year loan, now your repaying over another 30 years rather than another 26). The total interest paid would be higher (unless you paid extra principle to pay off the loan faster), but the issue they raised was the payments, not the total interest over the life of the loan. Once they make the basic assumption that I consider to be incorrect, they go on to do more and more sophisticated analysis based off this assumption. You are right that they are far more competent that either of us to do this analysis, but the world's best analysis won't produce a good result in your initial assumption is false. GIGO There whole argument only makes sense if refinancing the same amount at the same interest rate results in higher payments, even if you don't roll the closing costs in to the loan. If it can be shown that this really is the case, than I was wrong, and I'll admit to being wrong, but if it isn't their whole argument falls apart. Edit - Reading their paper, rather than just the conclusion gives more some more to go on. They make a point that people, even the elderly, tend to be reluctant to rely on home equity to cover their current consumption. That reluctance would indeed have the effect of keeping more of someone's net wealth tied up in their home equity than would otherwise be the case. But that's a different factor that the idea that refinancing at the same rate causes payments to rise.