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The complicated transaction: Using net present value to weigh the costs and benefits of the cash-out refinance

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  • Sonia Garrison
  • Wei Li

Abstract

Cash-out refinance transactions present unique challenges for borrowers as they involves a myriad of moving financial variables, making it difficult to evaluate the costs and benefits of the loans. While many states have passed legislation to protect borrowers from loan flipping by “net tangible benefit” requirements, no standard financial analysis has been utilized to effectively weigh the costs and benefits of these transactions. In this paper, we explore the appropriate measurements for “net tangible benefit” using simulated cash-out refinances as well as a unique dataset of subprime loans containing information not typically accessible to researchers. Our findings illustrate the complexity and potential pitfalls of these transactions, and suggest that a formal cost-benefit analysis for cash-out refinances should be considered as part of the larger mortgage reform currently underway.

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  • Sonia Garrison & Wei Li, 2011. "The complicated transaction: Using net present value to weigh the costs and benefits of the cash-out refinance," Housing Policy Debate, Taylor & Francis Journals, vol. 21(4), pages 585-603, August.
    • Handle: RePEc:taf:houspd:v:21:y:2011:i:4:p:585-603
    DOI: 10.1080/10511482.2011.615853
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    1. repec:eme:maj000:02686900410530565 is not listed on IDEAS
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    4. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
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