A famous proverb says – ‘All that glitters is not gold’ which means everything that looks attractive may not be valuable. This proverb precisely befits the refinancing mortgage industry as well. Refinancing home mortgage has always allured the borrowers as ‘money saver’ with its lower interest rates. But opting for refinancing mortgage by just considering the lower interest rates may not always prove rewarding, in fact it sometimes proves detrimental.
When considering refinancing home mortgage every person wants to strike the best deal suiting his situation. But it’s not possible if the person considers only interest rate as a factor, he needs to acknowledge loan term as an equally important factor. The combined effect of both these factors over the entire loan tenure will give the actual cost of the refinancing. The best refinance is one where the term of payment suits a person’s financial condition and budget.
Refinancing is taking a new debt to repay the existing loan yet it is a loan in its basic nature. The type of loan a person takes depends on the reason for which he is taking the loan. If a person needs to increase his monthly saving, he needs to ensure a lower monthly payment and longer loan tenure. While if a person can handle higher monthly payments, he can save thousands of dollars with a shorter term of loan.
Every person would dream of a loan at lowest possible interest and short tenure so that he pays it off at the earliest and free his house. But this is a very ideal situation, usually not possible. So while choosing a refinancing loan, a person must consider two important points –
• Choosing the loan amount and monthly installments that a person can afford.
• Choosing a loan tenure that fits in the long term financial plan of that person.
Banks usually do not advertise for shorter term loans like 10 or 15 years yet it does not mean that such loans do not exist. They advertise for loan plans that are profitable for them and might not be the best plan for the borrower. For example, a person may hear about a 30 year fixed rate loan at 5% interest and find it attractive. But, it is quite possible that for him the 10 year 7% fixed loan is most beneficial. Though the monthly payment in the second case would be a little higher, the interest paid by that person throughout the loan tenure would be substantially less.
Thus, before choosing a refinancing mortgage, a person must critically evaluate different scenarios related to the interest paid and his financial goals. People can take help of a mortgage specialist to assess their current lifestyle and financial situation to help decide the best term for their mortgage.
Interest rate is an over emphasized factor, the loan term is an equally influencing factor. The right deal may save a person hundreds of dollars while a wrong deal will cost him thousands of dollars. So always make calculations considering the various factors before going ahead with refinance.
