When Should I Stay Away From Re-Financing?

Many homeowners make a mistake in thinking that re-financing is a positive choice. This isn’t true and homeowners can actually be making a very significant financial mistake by re-financing at a time which is inopportune to them. There are a few classic examples of when re-financing can be a big mistake. This happens when the homeowner doesn’t stay in the property long enough to recuperate the cost of re-financing and when the homeowner has had a credit score which has dropped since the initial mortgage loan. Other examples are when the interest rate hasn’t dropped enough to offset the closing costs linked with re-financing.

Recovering the Closing Costs

When you try to determine whether or not re-financing is worthwhile, the homeowner should try to determine how long they would have to keep the property in order to recover the closing costs. This is important especially in the event where the homeowner’s intention is to sell the property in the upcoming future. There are re-financing calculators which are readily available which can provide homeowners with the right amount of time they will have to retain the property in order to make re-financing worth their while. These calculators will require the user to enter input such as the balance of the existing mortgage, the existing interest rate as well as the new interest rate and the calculator return results comparing the monthly payments on the old mortgage and the new mortgage and will also supply information about the amount of time needed for the homeowner to recuperate the closing costs.

When Credit Scores Take A Plunge

Most homeowners believe that a drop in interest rates immediately signify that it is time for re-financing the home. Nevertheless, when these interest rates are coupled with a drop in the credit score for the homeowner, the resulting re-financed mortgage might not be favourable to the homeowner. This is why the homeowners should consider their credit score at the present time more carefully and in comparison to the credit score at the time of the original mortgage. Depending on the amount of drop in the interest rates, the homeowner might still get a benefit from re-financing even with a lower credit score but it is not very likely. Homeowners might take advantage of free re-financing quotes in order to get an fairly accurate understanding of whether or not they will benefit from re-financing.

Have the Interest Rates Dropped Sufficiently?

Another common mistake that is made by homeowners with regards to re-financing is whenever there is a significant drop in interest rates. This can be a mistake because the homeowner must first carefully evaluate whether or not the interest rate has dropped enough for it to result in an overall cost savings for the homeowners. Homeowners often make do make this mistake because they don’t consider the closing costs which are linked to re-financing the home. These costs might comprise application fees, origination fees, appraisal fees and many other closing costs. These costs can add up quite fast and might eat into the savings which have been generated by the lower interest rate. In a few cases the closing costs might even exceed the savings that came from the lower interest rates.

Re-Financing Can Be An Advantage Even When It is a “Mistake”

In actual fact, re-financing isn’t always the best possible solution, but some homeowners might still opt for re-financing even when it is a technical mistake to do so. The classic example of this type of situation is when a homeowner re-finances in order to gather the benefits of lower interest rates even though the homeowner ends up paying a lot more in the long run for this re-financing option. This can happen when either the interest rates drop a little but not sufficiently to result in an overall savings or when a homeowner consolidates a considerable amount of short term debt into a long term mortgage re-finance. Though most financial advisors might advise against this type of financial approach to re-financing, homeowners sometimes go against conventional opinions and attempt to make a change which might increase their monthly cash flow through the reduction of their mortgage payments. In this situation, the homeowner will be probably making the best solution for his personal needs.

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