Why Rate Isn’t What You Think It Is

Have you ever heard the old wives tale that it only makes sense to refinanceif you can lower your interest rate by 2%? As it relates to refinancing, home equity loans, and purchases, most consumers are trained to make decisions based on interest rates. Why is that? It’s in the advertising and the commercials!

But interest rates are not all they are cracked up to be. Most banks won’t tell you that a loan is way more than just an interest rate.

Here are some things to consider:

1. Am I interested in paying off any bills other than my mortgage?
2. Am I interested in getting any cash out for home improvements or investment opportunities?
3. Am I concerned with what my monthly payment will be?
4. Do I care what company I will be working with for the next several years?

If you answered yes to any of these questions, then you understand that an interest rate only matters so much. I am not trying to tell you that an interest rate is not part of a loan, but I am telling you it is a small part of a bigger picture. Often, consumers will be more concerned with an interest rate than their target financial goal. Don’t be that consumer! So what’s the easiest way to make a decision going forward if it’s not solely based on interest rates?

Here is a simple process to follow when comparing loan offers:

1. Is the company I’m talking to reliable, rated highly, and customer service driven?
2. Does this loan accomplish all of my goals? (Debt consolidation, home improvements, cash out, etc.)
3. What will I have to write a check for to make this loan happen? (out of pocket expense and monthly payments)
4. How long do I have to make this monthly payment? (term of the loan)

And then… finally, if the answers to all the questions above are the exact same for all offers you’re considering…

5. What is the interest rate?

When you follow this process, you will find yourself actually improving your financial position and not just chasing interest rates.