The Benefits of Refinancing

The Net Tangible Benefit in a Cost-Reduction Refinance:

When a new interest rate or mortgage insurance premium is lower than the existing one, this is called a Cost-Reduction Refinance. In most of these cases, the borrower still manages to incur upfront costs. So if there is going to be a net benefit, it requires that future savings are greater than upfront costs.

However, future savings depend on how long the borrower is expecting to have the mortgage, among other things. This piece of information is one of many critical pieces only available inside of the borrower’s head.

The Net Tangible Benefit in a Cash-Out Refinance:

The motive of a “cash-out” refinance is to raise cash, and manages to bring about some of the worst market abuses.

Example: In raising $5,000 using this method, a borrower is forced to accept a 7% loan to replace his current loan of 6%, and to take on $5,000 in refinancing costs which are tacked on to the loan balance. There is a tangible benefit of $5,000, the cash the borrower received in refinancing this way. However, there is a high price to pay in the form of a higher interest rate, and hefty refinancing fees. Because of the great benefit and cost, it would be difficult for a lender to determine objectively whether the benefits outweigh the costs or vice versa.

The borrower’s options should also aid in determining whether or not a net benefit is available, as a borrower could possibly just as easily raise the $5,000 he or she needs elsewhere and perhaps at a much lower cost. If the borrower were able to raise the money in a different manner for a smaller cost, then there is no tangible net benefit to doing things in this manner.

Because there are so many contributing forces determining whether or not a tangible net benefit is available to a borrower after refinancing, it is safer simply not to make the lenders responsible for assessing the options of their customers.

The Net Tangible Benefit in a Payment-Reduction Refinance:

It may be worthwhile to refinance for the sake of monthly payment reduction, even when it means future wealth reduction as a price. This often involves converting a Fixed Rate Mortgage loan into an Adjustable Rate Mortgage loan carrying a lower rate and often with an interest-only option. The costs involved with this refinance are typically added to the balance.

Determining whether or not there is a net benefit is based on how critical it actually is to the borrower to lower the monthly payments. Only the borrower can truly tell whether this is or is not a viable option with a tangible net benefit.

The Net Tangible Benefit in a Risk-Reduction Refinance:

Because interest rates are widely expected to rise, many people who are holding Adjustable Rate Mortgages are considering refinancing them into Fixed-Rate Mortgages. These borrowers are willing to pay a higher interest rate now in exchange for certainty of future rates, which is the reason for the switch. In issues such as this, lenders should not substitute their own judgment for the borrower’s judgment.

Regardless of the motives behind a borrower’s decision to refinance, the question of whether they are receiving a tangible net benefit from it or not is something for the borrower to decide on his or her own. Lenders do not have any of the information required to judge these decisions.

However, lenders are not completely faultless, as borrowers often make decisions based on incomplete and occasionally misleading information provided by these lenders. Rather than require lenders to assume fault for the borrower’s bad decisions, they should simply be responsible for providing borrowers with all of the right information so that they may make informed decisions rather than hasty, misinformed ones.

In the past, many have believed that it fell on the Government to assure uniformity of disclosure rules across the market, but because the Federal Government appears unfit for the task, mandatory disclosure rules tend to be inadequate and quite obsolete.