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February 1, 2005

A great analogy

Reader Noel Sheppard sends in this smart email:

There is great consternation concerning the upfront transitions costs of Social Security reform. Frankly, what amazes me here is how folks like Nancy Pelosi, Harry Reid, and so-called economists like Krugman and others are missing a very simple analogy that has been transpiring rather frequently in our nation over the past three years -- mortgage refinancing.

Let me give you a real example. In 2003 as rates approached their lows, I bought down a 30-yr mortgage that had 26 years remaining on it and converted it to a 15-yr. fixed. Now, I wanted to drop this to a conforming note to get my new rate out of the typical premium that one pays for a jumbo. So, I included with all of my closing costs an amount of money that would accomplish this, thereby significantly reducing the size of the new note.

As such, similar to the upfront funds that are going to be required for us to reform Social Security, this process cost me money "today." However, when you add those costs to the remaining payments on the new note, it is hundreds of thousands of dollars less than if I had stuck with my old note.

Given this, I guess it is safe to say that Nancy Pelosi, Harry Reid, and Paul Krugman would disagree with me buying down my mortgage.

Posted by Don Luskin at February 1, 2005 9:10 AM | Print

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