When Is It A Mistake To Re-Finance?
Posted on 04. Jun, 2010 by Global in Uncategorized
Many homeowners make the mistake of thinking re-financing is always a viable option. However, this isn’t true and homeowners may make a big financial mistake by re-financing at the wrong time. There are a few examples of when re-financing is a mistake. This occurs when the homeowner does not stay in the property long enough to recoup the cost of re-financing and when the homeowner has had a credit score which has dropped since the original mortgage loan. Another instance is when the interest rate is not low enough to cover the closing costs that comes with re-financing.
Recouping the Closing Costs
In determining whether or not re-financing is worthwhile the homeowner should determine how long they would have to retain the property to recoup the closing costs. This is important especially if the homeowner has plans to sell the property in the future. Re-financing calculators are easy to get and will be able to give homeowners the time they need to be able to retain what they own to make re-financing worth it. These calculators require the user to enter input such as the balance of the existing mortgage, the existing interest rate and the new interest rate and the calculator return results comparing the monthly payments on the old mortgage and the new mortgage and also supplies information about the amount of time required for the homeowner to recoup the closing costs.
When Credit Scores Drop
Most homeowners believe a drop in interest rates should immediately signal that it is time to re-finance the home. When these interest rates are added to the low credit score, the result may not be too pleasing. Homeowners need to take extra care in considering their credit score to the one they had during the time of the original mortgage. Depending on the amount interest rates have dropped, the homeowner may still benefit from re-financing even if they are already in need of debt relief service but it is not likely. Homeowners can make use of the free re-financing quotes so they can understand whether re-financing may benefit them or not.
Have the Interest Rates Dropped Enough?
Another common mistake homeowners often make in regard to re-financing is re-financing 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 to result in an overall cost savings for the homeowners. Homeowners usually come upon this mistake because they tend to forget to think about the closing costs that comes with re-financing homes. These costs may include application fees, origination fees, appraisal fees and a variety of other closing costs. These costs can add up quite quickly and may eat into the savings generated by the lower interest rate. In some instances, the closing costs itself may be bigger than the savings from lower interest rates.
Re-Financing Can Be Beneficial Even When It is a “Mistake”
In reality re-financing is not always the ideal solution, but some homeowners may still opt for re-financing even when it is technically a mistake to do so. A common example of this is when the homeowner gets to re-finance with lower interest but ends up paying more in the long run. This may occur when either the interest rates drop slightly but not enough 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 which is sometimes what debt relief counseling will tell them to do. Although there are advices against this, homeowners will usually still take the chances and this may increase their monthly cash flow since they are able to reduce mortgage payments. In this situation the homeowner is making the best possible decision for his personal needs.
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