This article is compared with the article of wall street journal dated Jan. 12, 2009 10:00 a.m. with the concept time value of money. The title of the article is "Should You Refinance? ".
Time value of money states that money today in hand is worth than tomorrow. The value of more today is always more than tomorrow because we assume that person who agrees to receive payment at later date loses the capacities to invest that money at a moment, thus, loses interest. If we talk about the significance of time value of money, it helps investors to know the value of their investment which changes over time because of interest rate, inflation and risk associated with the money.
One of the principle concepts of time value of money is present value and the future value. Present value is the value of all the future cash flows while future value is calculated by adding all the interest earned by the money in the future. Another main concept of time value of money is: compounding and discounting. Compounding is the process of calculating interest over time to determine the future value. Discounting is a process to determine present value from the future value using a discount rate.
In the article "Should You Refinance?", author Brett Arends mainly talked about when to refinance the mortgage. He suggested that if the house owner wants to refinance the mortgage, they should refinance only if they plan to stay in the home for years and has an adjustable-rate mortgage. He added that, to make sense of refinancing house owner should be paying much more interest rate at present (Arends).
If you are ready to live in the same house for years to come and think that you can payback within two or three years, then it might be a good idea to refinance mortgage, said Greg McBride, economist at Bankrate.com
This article also suggested that before taking any decision house owner should consider tax value, time value of money and compound interest.
Time value of money is the very important concept of finance and is widely used all over the world. Through this article author tried to convey the message that only seeing the total amount of saving over time is not sufficient, one should consider its value over a period of time or more specifically over a long period of time. Due to the ongoing inflation, price are rising sharply, and its value is falling, so the value of our savings is a lot worth today than when you get the return. Another thing is we can also invest the money used as refinancing fees, which would yield a lot over years. Moreover, Time value of money also helps to determine the trade-off between spending today and investing in the future which helps house owner to take the correct decision whether to invest their money on refinancing or not.
This article reinforces the learning from the chapter. The total saving over the time might be seen as hefty money but considering its time value, the big sum in the future might be valued to few thousand dollars today. Even when the refinancing is done, then the installments will be more than the actual cost of the house. Due to the fact that compound interest is added on the installment, the financing cost will be more. So, the author of the article suggested that if the house owner wants to refinance the mortgage, they should refinance only if they plan to stay in the home for years and has an adjustable-rate mortgage.
Works Cited
Arends, B. "Refinancing Your Mortgage: Is it Worthwhile? - WSJ." N.p., 12 Jan. 2009. Web. <http://www.wsj.com/articles/SB123153162327368989>.
