Saturday, May 12, 2007

Refinancing: Focus On Rate or Term?

This issue is of great consequence because it will determine the costs and benefits that the borrower will obtain by refinancing the mortgage home loan. Let us analyze how these variables affect affordability.

It will depend basically on the needs of the borrower whether one should focus on the rate or the loan's term. However, there are additional things to take into account as in some situations a longer repayment program can imply non significant costs increments if the interest rate remains fixed and there are also salary rising along the whole duration of the loan's repayment program.

Who Focuses on The Interest Rate

Those who want to save money in the long run by refinancing will opt for focusing on finding a lender that offers the lowest interest rate on the refinance home loan. The reason is simple, the lower the interest rate, the lower the amount of money you will destine each year to pay off interests generated by the loan's principal. This will reduce the overall cost of the financial transaction and save you thousands of dollars.

However, focusing on the interest rate implies that your monthly payments will be altered only slightly and if you obtain a lower rate by refinancing your home loan with a shorter repayment program than the one of your previous loan, you may even end up paying higher monthly payments than before. This means that there will be overall savings but you may not have savings (or have to pay more) on a monthly basis.

Who Focuses on The Loan's Term

Those who want to have lower monthly payments or free some income for other expenses will opt for focusing on finding a lender that offers longer repayment programs so the loan repayment can be spread over a longer period of time. This in turn will reduce the monthly payments as the principal is divided into more installments. Thus, the longer the repayment program, the lower the monthly payments.

Obviously, as the loan repayment schedule gets longer, the interest rates tend to raise. However, since the longer the repayment program the higher the lender's profit, it reaches certain level where the interest rate remains the same. Also, short repayment programs are not so appealing for lenders and financial institutions because they do not imply high profits, thus, they discourage short terms by charging higher fees or higher interest rates so people choose longer repayment programs.

Evidently, whether to choose focusing on the loan's term or rate will depend on your particular needs. It is obviously advisable keeping an eye on the other variable as nothing justifies either too high rates or too short terms. Nevertheless, if you can not afford the monthly payments on your home loan, you will do much better trying to extend the repayment program than obtaining a lower rate because both things can seldom be achieved at the same time.

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