How to Refinance

How to Refinance: Monthly Payments vs. the Total Cost

by Gabriel Traverso
Mortgage Directory Columnist

When shopping for a mortgage, you will probably be bombarded by many different options. Not all of the home loan products out there, however, are right for you.

Remember that the business of mortgage loans is just that--a business. At the end of the day, the bank is out to make a profit. It's therefore up to you to know how to refinance your home loan in the way that best benefits you. Take the time to fully understand your options before you make a decision.

Low Interest Rates -- Too Good to be True?

Remember the old adage, "there's no such thing as a free lunch"? Before you take advantage of an unbelievable loan offer, make sure you fully understand the terms. A negative-amortization loan may promise an incredibly low interest rate--like perhaps 2% for the first five years--but it is really only deferring the interest and adding it to the principle. At the end of the low rate period, your payments are going to go rocketing up to pay down the deferred interest, and you end up paying much more in the long run. Similarly, on an interest only loan, the principle never decreases because you're only making interest payments.

How to Refinance: Short-Term or Long-Term

Long-term loans--20 or 30 year fixed rate loans with higher rates--are a good option for someone who is planning to stay in their home for a while and wants the stability of a consistent monthly payment. Short-term loans with adjustable interest rates or interest-only loans work for borrowers who plan to sell or refinance within a few years. You shouldn't just consider the monthly payments when you shop for a mortgage loan. Look at all of the factors before you make your decision.

About the Author
Gabriel Traverso is a freelance writer, independent musician, and artist. He resides in Reno, NV.