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Getting The Best Home Loan Rate Through Refinancing: Reduce Payment Or Shorten Loan Terms?

Jan 8, 2008
If you want to make your mortgage more manageable by refinancing, you have two options: you can reduce your payment while lengthening the mortgage terms, or shorten the mortgage terms while paying more or less the same amount monthly.

You may have observed how your adjustable home loan rate has been at its all time low in the recent years. Many people have started to resort to refinancing in order to cut down on mortgage costs. However, with refinancing, there might still be an element of risk involved. As such, some people find it wiser to shorten the mortgage payment terms instead of merely reducing monthly payments.

Home refinancing is a good option for those who would like to have better control of their finances. It is an excellent way to get a better home loan rate, lower monthly payments or shorten the duration of the mortgage itself. It is undeniable how refinancing is popular mainly because it is an opportunity to lower home loan rate while at the same time get better monthly payment deals. Though shortening mortgage duration is an option when refinancing, there are not as much people who go down this road.

Refinancing to Reduce Monthly Payments

The benefit of refinancing in order to reduce monthly payments is obvious and self-explanatory. When you refinance, you lower your interest rate and consequently lower the amount you need to pay. Who wouldn't want this deal? The amount you save may be used to pay off other bills, or you can save this to pay for a part of your principal. Of course, you should never fall into the lure of spending some more just because you have extra money on hand.

Reduce the Life of Your Home Mortgage

Refinancing can allow you to shorten your mortgage terms while maintaining your monthly payment. For example, you can lower your home loan rate by refinancing, and then reduce your mortgage life span from 20 years to 15, while maintaining the same monthly payment. It might be more difficult to see how your financial burden is lessened this way, since you still need to pay the same amount. However, if you think of it in a larger perspective and in longer term, you can see how this may be a better deal for you.

You can look at it this way. Imagine a home loan rate of 5% on a 30 year mortgage. This will most likely cost you almost twice the amount that you borrowed. On the other hand, a rate of 5% on a 10 year mortgage will only cost you about 30% more of your principal as payment for interest. With the 20% difference in these two, along with the fact that you free yourself from the financial burden faster, it is easy to see how this option can generate far better deals.

Needless to say, if you still find it more practical and manageable to reduce your home loan rate by reducing your monthly payments, then by all means, do so. However, if you can get by without the extra savings refinancing can provide you; it may be financially wiser to reduce your mortgage duration instead. In the end, the choice will depend on your circumstances and financial goals.
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