When Is It a Mistake to Refinance?
Many homeowners make the mistake of thinking refinancing is always a viable option. However, this is not true and homeowners can actually make a significant financial mistake by refinancing at an inopportune time. There a couple of classic example 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 refinancing and when the homeowner 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 refinancing is worthwhile the homeowner should determine how long they would have to retain the property to recoup the closing costs. This is significant especially in the case where the homeowner intends to sell the property in the near future. There are refinancing calculators readily available which will provide homeowners with the amount of time they will have to retain the property to make refinancing 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 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 refinance the home. However, when these interest rates are combined with a drop in the credit score for the homeowner, the resulting refinanced mortgage may not be favorable to the homeowner. Therefore homeowners 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 interest rates have dropped, the homeowner 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 refinancing.
Have the Interest Rates Dropped Enough?
Another common mistake homeowners often make in regard to refinancing is refinancing 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 often make this mistake because they neglect to consider the closing costs associated with refinancing the home. 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 cases the closing costs may even exceed the savings resulting from lower interest rates.
Refinancing Can Be Beneficial Even When It is a “Mistake”
In reality refinancing is not always the ideal solution, but some homeowners may still opt for refinancing even when it is technically a mistake to do so. This classic example of this type of situation is when a homeowner refinances to gain the benefit of lower interest rates even though the homeowner winds up paying more in the long run for this refinancing option. 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 refinance. Although most financial advisors may warn against this type of financial approach to refinancing, 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.
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