This is a guest post from the people at Lender 411.
The largest investment many of us will ever make is the purchase of a home. Many people purchase this “product” at least once during their lifetime. This “product”, however, is often so expensive that only a small fraction of potential buyers can actually afford to buy it in full at any given time. Few future homeowners have $300,000 in cash in their hands. Most of us will likely earn far more money than this over our lifetime, but we don’t have access to it all at once. In the meantime, we need a place to live.
A mortgage helps solve this problem. Banks, with access to large sums of money, agree to give you the $300,000 you need right now at a price. This price is what we call interest, and you may have heard it said that “interest is the price of money”. This is true in one sense, but in reality what you’re paying for is time. Remember, you will undoubtedly earn far more than $300,000 over the course of your career. The interest, the “price” that the bank charges you, is not buying you the actual $300,000 itself. You will eventually earn that either way. What you get is time. The bank gives you $300,000 and time, often 30 years or so, in which to earn this money. You ultimately give the bank $300,000 back plus the price of the time.
Different banks charge different rates for their time, and of course, the amount of time you’re buying will differ from bank to bank as well and will depend on your personal situation. But at the core, this is how mortgages work.
What’s the value of a mortgage refinance? Simply put, a refinance allows you to repurchase the time that you’ve bought from your bank at a different interest rate, one that is lower and more favorable to you. You can also extend the life of your loan, buying you additional time at this decreased rate. A refinance, then, is like purchasing additional time at a lower price. If you can find or arrange such a deal, a mortgage refinance can be immensely valuable.
There’s the logic behind it. As you consider whether this financial step would benefit you, remember one thing. Time is a commodity. You can buy it from any financial institution. Educate yourself and learn what your options are. Find the lowest mortgage rates that are available to you, because the lowest rate will get you the best price on the time that you’ve purchased.