Why not refinance when interest rates rise?
Interest is the relative price of present vs. future assets. The higher the interest rates, the more future assets cost in terms of present assets. When you take out a loan you are buying present assets by paying future assets, and the lower the interest rate the better for you. Once you have taken out a fixed rate loan, however, you hold present assets and owe future assets, and it seems you should prefer higher interest rates. Thus when interest rates rise that should be good news for you, and when interest rates fall that should be bad news. So why do homeowners act like falling rates are good news, and why are they so much more eager to refinance loans when rates fall rather than when rates rise? Am I missing something? For example, if you borrowed $100,000 at 7% interest, owing $7000 per year forever, and then interest rates rose to 10%, then you should be able to get someone else to take over your $7000 per year obligation for only $70,000. So you should be able to refinance, make the same loan payment, and have $30,000 more equity in your house. Robin Hanson [EMAIL PROTECTED] http://hanson.gmu.edu Asst. Prof. Economics, George Mason University MSN 1D3, Carow Hall, Fairfax VA 22030- 703-993-2326 FAX: 703-993-2323
Re: Why not refinance when interest rates rise?
Robin, Note that you can't be better off "refinancing" since your payments continue to be $7000 a year - thus consumption never rises and your puzzle must involve an illusion! So where is it? Run your example in reverse. You borrow $70,000 at 10% paying $7000 per year forever. The interest rate then falls to 7%. You thus borrow $100,000 at 7% and, *following your logic*, you now take $70,000 of the new $100,000 and pay off your loan giving you a savings of $30,000. Great, but wrong! You owe the bank $7000 per year which at a 7% interest rate now has a NPV of $100,000 - you therefore must give the bank $100,000 not $70,000. No gain. The key is that the NPV of the $7000 per year is $100,000 at a 7% interest rate but only $70,000 at a 10% interest rate so *regardless* of whether you "refinance" or not the real value of your mortgage changes with the interest rate. Essentially, what refinancing does in your example is to reflect the real changes in nominal terms which otherwise would not occur. What you should do when the interest rate goes up is save more - that is the only source of gain. Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]
Pocket Change
A friend of mine noticed that men tend to carry rather large amounts of change in their pockets compare to women. Any economic explanation of why this is? -fabio
Re: Pocket Change
I can't resist claiming that men have more pockets, and therefore the comparison is not between similar groups. Perhaps there is also a Freudian or anthropological explanation. Or it could be an aesthetic consideration, considering that bulging pockets may not be considered flattering. But surely, it is unlikely for men to have a greater need for pocket change than women. Both sexes have similar needs to use vending machines, commercial laundry, public transportation and so on, so I'd rule out an economic motivation. It is more likely to be aesthetic, I'm guessing. But what is a "large" amount here? -Nick fabio guillermo rojas wrote: A friend of mine noticed that men tend to carry rather large amounts of change in their pockets compare to women. Any economic explanation of why this is? -fabio
about Pocket Change
Fabio, An explanation I would like to offer is that because of the fact that traditionally money has been metal, and therefore coin, and until recently the purchasing power of coins was relatively high, a large amount of coins signaled wealth. And in the market for mates, this signaling where the male has traditionally been the provider, has indicated a potentially better mate than those who do not signal their wealth with a pocket jingaling of coins. Let me know what you think about this idea. Christopher :o) Resident Advisor, TAP 3-105 x6034- Economics and English, IT minor - Peer Advisor Freshman Center" http://mason.gmu.edu/~cmanocch "If you can dream it, you can do it." Walt Disney. Fight with love in your heart, not war "...in which even the fruits of victory would be ashes in our mouth." John Fitzgerald Kennedy. "The most beautiful thing we can experience is the mysterious." Albert Einstein "Let us not seek to satisfy our thrist for freedom by drinking from the cup of bitterness and hatred." Martin Luther King, Jr. - Original Message - From: fabio guillermo rojas [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Thursday, December 14, 2000 3:55 PM Subject: Pocket Change A friend of mine noticed that men tend to carry rather large amounts of change in their pockets compare to women. Any economic explanation of why this is? -fabio
Re: Pocket Change
I would say that men only have one place to put change (pockets). Most women have two places to put change (pockets and handbags). Maybe the real question is why don't men carry handbags? Speaking from experience, it's much easier to carry change in a handbag rather than pockets. Change doesn't fall out of my handbag, like it does a pocket, and I don't jingle when I walk. Also, I don't have to transfer my change every time I change clothes... I almost always use the same handbag, with exceptions for special occasions or a different color shoe. :) In addition, many articles of women's clothing do not even have pockets, so we're probably accustomed to finding other ways to carry our change. Interestingly, my most expensive dresses and suits don't have pockets, while my more inexpensive clothing does. I'm not sure why this is. But I definitely prefer the more expensive clothes without pockets. So why don't men carry handbags? Amanda Accountant CNet/ZDNet From: fabio guillermo rojas [EMAIL PROTECTED] Reply-To: [EMAIL PROTECTED] To: [EMAIL PROTECTED] Subject: Pocket Change Date: Thu, 14 Dec 2000 14:55:14 -0600 (CST) A friend of mine noticed that men tend to carry rather large amounts of change in their pockets compare to women. Any economic explanation of why this is? -fabio _ Get more from the Web. FREE MSN Explorer download : http://explorer.msn.com
