Many homeowners can make the mistake by thinking refinancing is always a viable option. However, this is not always true and homeowners can actually make a significant financial mistake by refinancing at an inopportune time. There a couple of classic example of when refinancing 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 if the property has lost value and can’t support the new debt, when the interest rate has not dropped enough to offset the closing costs associated with refinancing or other opportunities are not present.
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 financial calculators readily available which will provide the homeowner information that will help determine if refinancing worthwhile. These calculators require the user to enter such information like 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. This is valuable information and is simple to understand.
When Credit Scores Drop
Most homeowners believe a drop in interest rates should immediately signal that it is time to refinance the home. This isn’t exactly correct. It should signal a time to investigate the opportunity to refinance. However, when these interest rates are combined with a drop in the credit score for the homeowner, refinancing 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 refinancing even with a lower credit score. Homeowners may take advantage of free refinancing quotes to get an approximate understanding of whether or not they will benefit from refinancing. They would be highly encouraged to do so.
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. As stated earlier, you need to investigate the cost and the benefits.
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. Also to be seriously considered is equity realignment. Often a homeowner may have all or a majority of their wealth tied up in their home. This generally is a very poor idea and should take some very serious investigating.