"We refinanced six months ago to a fixed-rate loan for 30 years at 6.125 percent. My loan officer just called me to say that he can give me a 5.75 percent rate with no closing costs. I'm tempted but I have already paid five months of the term and am reluctant to give that up. Am I right?"

No, you aren't giving up anything. What you accomplished in the five months is a reduction in the loan balance equal to the five 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 355 months. That is easily remedied, however, by making a small increase in your monthly payment. The increase is $3.09 for each $100,000 of loan amount, which I found using my calculator 2c (www.mtgprofessor.com). You might want to pay off even earlier by making the same payment at 5.75 percent that you were making at 6.125 percent. Calculator 2a indicates that if you do that, you will pay off in 326 months.

"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, but I'm afraid that interest rates will go up and I'll lose my chance. What do you recommend?"

I recommend you forget about your $4,500 because it is gone. Use my calculator 3a to determine whether or not it pays to refinance now.

You will notice that the calculator, before it can provide an answer, must be given information about a number of things, including the interest rates on your current and new loans and the points and others costs of the new loan. But the costs you incurred on your previous refinance are not there, because they are irrelevant to whether you should refinance again.

Another Truth in Lending Lie?

"My loan officer said not to worry about the finance charges, that they would be deducted from the amount financed. Does that mean I won't have to pay them?"

No, you have to pay them all right. Lenders don't charge fees that they don't expect to be paid. 

I have been asked this question numerous times, puzzled each time as to why it was asked, since it makes no sense. Then one day it hit me. It is another misuse of Truth in Lending (TIL) to confuse the borrower.

Among the pieces of misinformation contained on the TIL is one called "Amount Financed." It is the loan amount less prepaid finance charges, which are the charges paid at closing. For example, if the loan is $100,000 and the borrower pays three points, or $3,000, the amount financed is $97,000. The geniuses designing this form thought that you should be told that the lender wasn't "really" advancing you $100,000 because they got $3,000 of it back from you at the outset.

I now realize that this piece of misinformation is not just useless, it is less than useless. It allows loan officers to say, with a straight face, "the finance charges are deducted from the amount financed." And you are supposed to say to yourself, "Oh, that's all right then," as if that meant that you won't have to pay the charges. You didn't swallow the bait, but I wonder how many have?

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.

Copyright 2003 Jack Guttentag