The How-to-Refinance Toolkit: Why Length Matters

By Richard Barrington
NFNS Columnist

Borrowers have an ever-widening array of mortgage terms available to them. Choice is good, but it does make comparing mortgage providers a little more difficult. One challenge when researching how to refinance mortgages is making accurate comparisons between, what can be, very different products. Matching up time periods before comparing lenders’ interest rates -- or better yet, annual percentage rates (APR) -- is an important item for your how-to-refinance toolkit.

The Yield Curve -- Interest Rates Over Time

A fifteen-year mortgage will almost always have a different interest rate than a thirty-year mortgage. In general, interest rates on short-term loans are lower than long-term loans, with the rationale being that risk increases the longer money is owed. On rare occasions, the yield curve (think of a graph plotting interest rates from short-term to long-term) becomes inverted, meaning long rates are actually lower than short rates. Again though, this is rare, and the important point is that interest rates for longer loan periods tend to have higher APRs.

Comparing Mortgages -- Matching Lengths

Another tool for your how-to-refinance kit is knowing not to compare mortgage providers based on rates for loans of different lengths. Decide first which length fits your needs, and then use that as a basis to compare.

When refinancing, you'll also want to compare a potential mortgage against your existing mortgage. As you do this, remember that the length of your existing loan is the number of years left on the mortgage, not the original term of the loan. Therefore to make a valid comparison, try to match the length of a new mortgage with the time remaining on your current mortgage. This will give you a better comparison of whether or not you can replace your existing debt with a similar loan at a lower rate.   

About the Author
Richard Barrington is a freelance writer and novelist who worked as investment industry executive for over twenty years.

How to Refinance

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