Refinance Calculators
Friday, January 26th, 2007When a person obtains a secured loan with the intention of replacing or consolidating other secured loans procured with the very same assets, the transaction is termed as refinancing. A home mortgage loan refinancing is the most common example of this. Such refinancing is invariably resorted to for a few reasons that provide some amount of financial relief to the borrower.
A debtor desiring to get his interest payment costs to be reduced goes in for refinancing. A person who wishes to pay off certain other debts owed by him plans for such refinancing. A borrower who wants to increase the period of repayment in order to reduce the monthly installments paid arranges for a longer-term loan. One who would like to dispose of a portion or the all of the property also resorts to such refinancing.
Interest calculation is one of the most important factors that has to be taken into consideration in refinancing process. There are several refinance calculators that are in practice. An understanding of these refinance calculators will provide the borrower with a clear idea of what he/she is getting into and plan for easy and hassle-free repayment. The effective interest rate is termed as annual percentage rate (APR). The APR also takes into account the total loan amount as well as the one-time fees like processing fee, documentation charges, etc.
Let us consider an example of an effective annual interest rate of 10% to understand refinance calculators. This interest rate can be expressed in more than one way. A lender might say the effective monthly interest rate is 0.7974%. Otherwise, he might mention that the annual interest rate compounded monthly is 9.569%. Alternatively, he might reveal that the advance annual interest rate is 9.091%. It has to be understood that a few lenders would try to express the effective interest rate as 9.1% annual rate in advance, to make the rate look cheaper. In cases where the interest rates are much higher, such a way of mentioning could give the impression of a large difference in the actual rate charged. The borrower should not get led away by this and be very clear about refinance calculators.
To cite a few more examples to clarify this, let us assume that a loan of $100,000 is repaid in 12 monthly installments of $8,771.56. The total amount paid would be $105,258.72. This does not mean that that effective APR is 5.26%, simply because the principal amount was being repaid every month and not at the end of twelfth month.
Further, let us assume that the loan of $100,000 includes a $1,000 processing fee, and that the monthly installments are $946.01 for 240 months at an interest rate of 9.569% compounded monthly. In such a case, the effective APR works out to 10.31% and not 10%.
From the above, it is obvious that a borrower should make a careful analysis of the various interest rates offered by understanding the underlying principle of refinance calculators to arrive at an informed decision.
