Refinancing A Mortgage - When Refinancing Might Not Be Recommended
Refinancing is not always a good choice. Homeowners can lose substantial money if they refinance under the wrong circumstances. There are many instances where refinancing will not be in the homeowner's financial favor. Some examples of this include a homeowner who does not own their property an adequate amount of time to recover refinancing costs or interest rates have not decreased enough to compensate for closing costs.
Closing Costs Recovery
The homeowner needs to decide how long they will own their property. This is especially important if a homeowner does not plan to own the property for an extended period of time. This aspect is important in establishing whether refinancing is advantageous. Refinancing calculators are available online to assist the homeowner in calculating how long they need to own their property to recover closing costs. The calculators base calculations on the current mortgage balance and interest rate and the new interest rate. Current monthly payments and new monthly payments will be shown. The results will tell the homeowner how long they need to own the property to recoup closing costs.
Credit Score Drops
Homeowners watch interest rate fluctuations closely and, when rates drop, automatically assume it would be best to refinance. If the homeowner has a poor credit rating, however, the drop in interest rates may not be sufficient to warrant refinancing. The homeowner need to compare their current credit score with the credit score they had at the time they applied for the current mortgage. If the credit score has deteriorated, it is likely the homeowner would not benefit from refinancing even with lower interest rates. Requesting refinancing quotes from several lenders will give the homeowner an idea whether refinancing is in their best interests.
Sufficient Interest Rate Decreases
A drop in interest rates does not necessarily mean there are advantages to refinancing. The decrease must be sufficient to provide the homeowner with an overall savings. Overall savings takes into account closing costs expenses. Closing costs generally include application, appraisal and origination charges, along with other miscellaneous fees. Closing costs can total a significant amount which, in turn, will decrease the amount of savings generated by a lower interest rate. Homeowners need to investigate whether interest rates savings will exceed the closing costs.
Refinancing Sometimes Advantageous in Unfavorable Circumstances
As contrary as it sounds, for some homeowners refinancing is an advantage even if the figures do not favorably support such a decision. The homeowner's goal in this situation is to reduce their monthly payments. Even though they will not receive enough of a reduction in interest rates to recover closing costs, homeowners in this position will still consider that they have attained their purpose. Another example where financial advisors will recommend against refinancing is if the homeowner is consolidating high interest short term debts into a mortgage loan. Although the homeowner will not ultimately realize overall savings because the debt incorporated into the mortgage now has an extended term, the homeowner will have reduced their monthly payments.
Reflection on the information provided in this article should give the homeowner a solid basis on which to form their decision.
