When Is It a Mistake to Re-Finance?
Home re-financing always seems like a great idea as often it looks like you will have lower payments, better terms on the loan and even cash out some of the equity in your home and have some cash in your pocket. However, this isn’t true and householders can really make a significant financial mistake by re-financing at an inopportune time. There a couple of classic example of when re-financing is a mistake. This occurs when the householder doesn’t stay in the property long enough to recoup the price 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 rate of interest hasn’t dropped enough to offset the closing prices associated with re-financing.
Recouping the Closing Costs
In determining whether or not re-financing is worthwhile the householder should determine how long they’d have to retain the property to recoup the closing prices. This is significant specially in the case where the householder intends to sell the property in the near future. There are re-financing calculators readily available which will provide householders with the amount of time they’ll have to retain the property to make re-financing worthwhile. These calculators require the user to enter input such as the balance of the existing mortgage, the existing rate of interest and the new rate of interest and the calculator return results comparing the every month 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 householders believe a drop in rates of interest should immediately signal that it’s time to re-finance the home. However, when these rates of interest are combined with a drop in the credit score for the householder, the resulting re-financed mortgage may not be favorable to the householder. So householders should carefully consider their credit score at the present time in comparison to the credit score at the time of the original mortgage. Depending on the amount rates of interest have dropped, the householder may still benefit from re-financing even with a lower credit score but it’s not likely. Householders may take advantage of free re-financing quotes to get an approximate understanding of whether or not they’ll profit from re-financing.
Have the Interest Rates Dropped Enough?
Another common mistake householders frequently make in regard to re-financing is re-financing whenever there’s a significant drop in rates of interest. This may be a mistake as the householder must first carefully evaluate whether or not the rate of interest has dropped enough to result in an overall cost savings for the householders. Householders frequently make this mistake as they neglect to consider the closing prices associated with re-financing the house. These prices may include application fees, origination fees, appraisal fees and a variety of other closing prices. These prices may add up rather quickly and may eat into the savings generated by the lower rate of interest. In some cases the closing prices may even exceed the savings resulting from lower rates of interest.
Re-Financing Can Be Beneficial Even When It is a “Mistake”
Actually re-financing isn’t always the ideal solution, but a few householders may still opt for re-financing even when it’s technically a mistake to do so. This classic example of this type of situation is when a householder re-finances to gain the profit of lower rates of interest even though the householder winds up paying more in the long-term for this re-financing alternative. This may occur when either the rates of interest drop slightly but not enough to result in an overall savings or when a homeowner consolidates a considerable amount of short-run debt into a long-run mortgage re-finance. Although most financial advisors may warn against this type of financial approach to re-financing, homeowners sometimes go against conventional wisdom to make a change which may increase their monthly cash flow by reducing their mortgage payments. In this situation the homeowner is making the best possible decision for his personal needs.