The Economics of Mortgage Refinancing
Buying a home is usually the biggest financial commitment most American families will ever make. First time home buyers may find it particularly intimidating. The keys are to understand the procedures and processes of home buying and develop the skills to reduce the cost of home ownership.
Because most Americans cannot afford to own a house, they often acquire a mortgage to purchase a house. Mortgages are a particular type of loan. This definition is simple enough to capture the essence of the term, but it barely scratches the surface of the complex issues that lie underneath. It is more than simply a monthly payment. A mortgage is an instrument used to finance an asset.
On a household's balance sheet, a mortgage is a liability and is subtracted from the house's assets to determine its net worth. Many aspiring home buyers refinance their mortgage in the hopes of reducing their monthly payments, without considering its effect on their net worth. Does refinancing a mortgage work, or is it simply a temporary solution to a bigger problem? A simple payback method is often used to determine the economics of refinancing.
The payback period in Houston mortgages refer to the length of time required to recover the cost of investment. This is calculated as the sum of the monthly payment savings that can be realized by refinancing into a new mortgage at a lower interest rate and determining the month in which that cumulative sum of the monthly payment savings is greater than the cost of refinancing.
However, there are problems associated with the payback period method when applied to most Houston mortgages. It ignores the benefits after the payback period, so it does not ensure profitability. Furthermore, such an equation ignores the time value of money. When a mortgage balance increases through refinancing, the liability side of the household inevitably increases, and the household's net worth immediately decreases by the amount equal to the cost of refinancing.
A more economically sound way to determine if refinancing in Houston mortgages is sound is to incorporate the true costs of refinancing to the household's net worth and compare the remaining amortization schedule of the current mortgage against the amortization schedule of the new mortgage. By calculating the true cost of refinancing, you can accurately determine what the real payback method will be if you choose to do so.
Because most Americans cannot afford to own a house, they often acquire a mortgage to purchase a house. Mortgages are a particular type of loan. This definition is simple enough to capture the essence of the term, but it barely scratches the surface of the complex issues that lie underneath. It is more than simply a monthly payment. A mortgage is an instrument used to finance an asset.
On a household's balance sheet, a mortgage is a liability and is subtracted from the house's assets to determine its net worth. Many aspiring home buyers refinance their mortgage in the hopes of reducing their monthly payments, without considering its effect on their net worth. Does refinancing a mortgage work, or is it simply a temporary solution to a bigger problem? A simple payback method is often used to determine the economics of refinancing.
The payback period in Houston mortgages refer to the length of time required to recover the cost of investment. This is calculated as the sum of the monthly payment savings that can be realized by refinancing into a new mortgage at a lower interest rate and determining the month in which that cumulative sum of the monthly payment savings is greater than the cost of refinancing.
However, there are problems associated with the payback period method when applied to most Houston mortgages. It ignores the benefits after the payback period, so it does not ensure profitability. Furthermore, such an equation ignores the time value of money. When a mortgage balance increases through refinancing, the liability side of the household inevitably increases, and the household's net worth immediately decreases by the amount equal to the cost of refinancing.
A more economically sound way to determine if refinancing in Houston mortgages is sound is to incorporate the true costs of refinancing to the household's net worth and compare the remaining amortization schedule of the current mortgage against the amortization schedule of the new mortgage. By calculating the true cost of refinancing, you can accurately determine what the real payback method will be if you choose to do so.
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