Whether or not to re-finance is a question homeowner may ask themselves again
and again while they are living in their home. Re-financing is essentially
taking out one home loan to repay an existing home loan. This may sound odd at
first but it is 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 it might be time to consider
re-financing. There are certain situations which make re-financing worthwhile.
These situations may include when the credit scores of the homeowners improve,
when the financial situation of the homeowners improves and when national
interest rates drop. This article will examine each of these scenarios and
discuss why they may warrant a re-finance.
When Credit Scores Improve
There are presently so many home loan selections offered, 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, those with poor credit are likely to be
offered unfavorable loan terms such as high interest rates or variable interest
rates instead of fixed rates. This is because the lender considers these
homeowners to be higher risk than others because of their poor credit.
Fortunately for those with poor credit, many credit bloopers can be repaired
over time. Some financial blemishes such as bankruptcies simply disappear after
a number of years while other blemishes 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.
When a homeowner’s credit score improves very much, the homeowner 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 each year and determine whether or not their credit has
increased significantly. When 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
An adjustment in the homeowner’s financial state of affairs can also warrant
investigation into the process of re-financing. A homeowner may find himself
making considerably more money due to a change in jobs or considerably less
money due to a lay off or a change in careers. In either case the homeowner
should investigate the possibility of re-financing. The homeowner may find an
increase in pay may allow them to obtain a lower interest rate.
On the contrary a homeowner who loses their job or takes a pay cut as a result
of a change in careers may hope to refinance and consolidate their debt. This
may result in the homeowner paying more because some debts are drawn out over a
longer period of time but it can result in a lower monthly payment for the
homeowner which may be advantageous at this juncture of his life.
When Interest Rates Drop
Interest rates lessening is the one pointer that sends many homeowners rushing
to their lenders to discuss the possibility of re-financing their home. Lower
interest rates are certainly appealing because they can result in an overall
savings over the course of the loan but homeowners should also realize that
every time the interest rates drop, a re-finance of the home is not warranted.
The caveat to re-financing to take advantage of lower interest rates is that the
homeowner should carefully 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 homeowner does not
benefit from re-financing and may actually lose money in the process.
The mathematics connected with determining whether or not there is an actual
savings is not exceedingly complicated 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 or not re-financing is worthwhile.