When Does It Pay to Refinance and When NOT to Refinance

Nowadays homeowner may ask himself/herself a question whether to re-finance or not. Re-financing is known as essential withdrawal of one home loan to repay an existing home loan. It is vitally important to realize when this is done properly it can result in a significant cost savings for the homeowner over the course of the loan. When there is the potential for an overall savings re-financing must be considered. There are certain situations which make re-financing worth-while. This article will examine each of these scenarios and discuss why they may warrant a re-finance.

When Credit Scores Improve

It is well known that there are a great number of home loan options available at the present time, that even those with poor credit are likely to find a lender who can assist them in realizing their dream of purchasing a home. However, such people may be offered unfavorable loan terms such as high interest rates or variable interest rates instead of fixed ones. This fact can be explained in the following way: the lender considers these homeowners to be higher risk than others due to their poor credit.

Fortunately, for those who possess poor credit, many credit mistakes can be repaired over time. Some financial blemishes such as bankruptcies simply disappear after a number of years while other defects such as frequent late payments can be minimized by maintaining a more favorable record of repaying debts and demonstrating an ability to repay existing debts.

Moreover, when a homeowner’s credit score considerably improves, he/she should inquire about the possibility of re-financing their current mortgage. All citizens are entitled to a free annual credit report from each of the three major credit reporting bureaus. Homeowners should take advantage of these three reports to check their credit annually and determine whether their credit has increased significantly or not. In case they notice a significant increase, they should consider contacting lenders to determine the rates and terms they may be willing to offer.

When Financial Situations Change

It should be noted that a change in the homeowner’s financial situation can warrant investigation into the process of re-financing. A houseowner may find himself making considerably more money due to a change in jobs or less money because of a lay off or a change in careers. In either case the homeowner should investigate the possibility of re-financing. He/she may find out that an increase in pay may allow them to obtain a lower interest rate.

Hence, a houseowner who loses the job or takes a pay cut as a result of a change in careers may hope to refinance and consolidate his/her debt. This may result in the homeowner’s paying more due to the fact that some debts are drawn out over a longer period of time but can result in a lower monthly payment for the houseowner which may be rather advantageous at this juncture of life.

When Interest Rates Drop

Thus, interest rates dropping may be understood as one of the signals that sends to many homeowners rushing to their lenders a warning to discuss the possibility of re-financing their properties. Lower interest rates are certainly appealing because they can result in an overall savings over the course of the loan but houseowners should also realize that every time the interest rates drop, a re-finance of the home is not warranted. The caveat to implement re-financing as well as to take advantage of lower interest rates are those options that the homeowner should carefully consider. Moreover, it is necessary to evaluate the situation to ensure the closing costs associated with re-financing do not exceed the overall savings benefit gained from obtaining a lower interest rate. This is significant because if the cost of re-financing is higher than the savings in interest, the houseeowner does not benefit from re-financing and may actually lose money in the process.

It may be concluded that the mathematics associated with determining these situations is not overcomplicated but there is the possibility that the homeowner will make mistakes in these types of calculations. Fortunately, there are a number of calculators available on the Internet which can help homeowners to determine whether re-financing is worthwhile or not.