By Amer Chaudri
Submitted 2012-04-04 11:16:30
Number Of Times Read: 45
Here is the USA (and even around the world) we have been living in one of the most prolonged low rate environments in recent memory. It began several years back as we were exiting a scandalous market crash following the dotcom bubble and corporate disasters around the likes of Enron and WorldComm. In a bid to carry the US and the world economy, Alan Greenspan and the Federal Reserve managed interest rates lower so the mortgage, construction and a plethora of related industries could flourish.
Refinancing can be pretty and cute; especially when it lowers a mortgage payment from $2,500 to $1,700 or a car payment for $350 to $250. For most people, the lure is too great and has real value and merit. But, there are times when refinancing truly is a wolf in a sheep s clothing. The prime consideration when you are looking to refinance your home or car is how long you have held the loan, and you need to understand how the payment schedule works. In a fixed loan product, the payment is comprised of the principal and interest. Although the payment is fixed and may never change over the life of the loan, the components are anything but. If you ever plug your loan data into a Loan Calculator (you can find plenty online for the kind of loan you have), most will display the portion of principal and interest in each payment over the life of the loan. Initially, interest forms most of the payment. The balance shifts over time and towards the end of the schedule principal forms most of the payment. It s done this way so banks and finance companies can avail the opportunity of making a profit where they are investing a lot of upfront costs in originating the loan (staff, sales channel, underwriting process etc).
So, here is where it can go terribly wrong. Even though your interest payments in totality are what your loan s fixed rate says but not at any given point in time. As I just mentioned, initially they are much higher and later they are lower. Let s say you are in the middle of your loan schedule or later and your loan principal is finally being paid down at a substantial pace. At this point, if you refinance and lower your payment by at least 25 or more, you could be shooting yourself in the foot. First, you will reset the schedule and go back to taking down your loan principal by minimal amounts. Secondly, you net interest payments will remain high as you never matured through your payment schedule. So, next time you look to refinance your home with more than six or seven years into the loan and a car with more than 2 years into the loan, look very carefully. Do the math right, and you may just discover that your remaining interest payments are actually much lower than the stated rate; the large portion of your amount is paying down principal. Stay put, and stay right.
Author Resource:-
Amer Chaudri is a 16 year veteran of the banking and finance industry where he has worked in diverse roles and management positions including back-end planning, front-end sales and financial management. He is the author of "Diatribe: A Scathing Journey Into the Heart of the Corporate Financial Culture". He wrote the book in 2010 on recent history in the financial and banking worlds leading up to the contemporary economic and financial crises. You can purchase a copy of the book at http://Amazon.com by following this link: http://www.amazon.com/Diatribe-scathing-Financial-corporate-digressions/dp/1608444740/ref=sr_1_1?ie=UTF8&s=books&qid=1289738769&sr=1-1justhost promotion
![[Valid RSS feed]](http://www.lodester.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Submitted 2012-04-04 11:16:30
Print Article
