When Is It a Mistake to Re-Finance?

Many homeowners make the mistake of thinking re-financing is always a viable option. However, this is not true and homeowners can actually make a significant financial mistake by re-financing at an inopportune time. There a couple of classic illustration of when re-financing is a mistake. This occurs when the householder does not stay in the belongings long enough to reimburse the cost of re-financing and when the householder has had a credit score which has dropped since the original mortgage loan. Other examples are when the interest rate has not dropped enough to offset the closing costs associated with re-financing.

Recouping the Closing Costs

In determining whether or not re-financing is worthwhile the householder should determine how long they would have to retain the belongings to reimburse the closing costs. This is significant especially in the case where the householder intends to sell the belongings in the near future. There are re-financing calculators readily uncommitted which will render homeowners with the amount of time they will have to retain the belongings to make re-financing worthwhile. 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 figurer return results comparing the monthly payments on the old mortgage and the new mortgage and also supplies information about the amount of time needful for the householder to reimburse the closing costs.

When Credit Heaps Drop

Most homeowners believe a drop in interest rates should immediately signal that it is time to re-finance the home. However, when these interest rates are combined with a drop in the credit score for the householder, the resulting re-financed mortgage may not be favourable to the householder. Therefore homeowners should carefully see their credit score at the present time in comparing to the credit score at the time of the original mortgage. Depending on the amount interest rates have dropped, the householder may still benefit from re-financing even with a lower credit score but it is not likely. Homeowners may take advantage of free re-financing quotes to get an approximate understanding of whether or not they will benefit from re-financing.

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 householder must first carefully valuate whether or not the interest rate has dropped enough to result in an overall cost savings for the homeowners. Homeowners often make this mistake because they neglect to see the closing costs associated with re-financing the home. These costs may include coating fees, origin fees, estimate fees and a mixture 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 cases the closing costs may even transcend the savings resulting from lower interest rates.

Re-Financing Can Be Good Even When It is a Mistake

In realness 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. This classic illustration of this type of position is when a householder re-finances to gain the benefit of lower interest rates even though the householder winds up paying more in the long run for this re-financing option. This may happen when either the interest rates drop slightly but not enough to result in an overall savings or when a householder consolidates a considerable amount of short term debt into a long term mortgage re-finance. Although most financial advisors may admonish against this type of financial approach to re-financing, homeowners sometimes go against formal sapience to make a change which may increase their monthly cash flow by reducing their mortgage payments. In this position the householder is making the best possible decision for his personal needs.

Posted on Apr 17th, 2008 by Petra Benton

Your comment: