When is it a Mistake to Re-finance?

Many homeowners make the mistake of thinking re-financing is always a viable option. However, this is not true and homeowners can actually make a significant financial mistake by re-financing at an inopportune time. There are a couple of classic examples of when re-financing is a mistake. One is when the homeowner does not stay in the property long enough to recoup the cost of re-financing and the second is when the homeowner has a credit score which has dropped since the original mortgage loan. another examples is 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 re-financing 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 within afew years of obtainging the loan. There are re-financing calculators readily available which will provide a homeowner with the amount of time they will have to retain the property to make re-financing worthwhile. These calculators require the user to input specific information such as, balance of the existing mortgage, existing interest rate and the new interest rate after which the calculator will return results comparing the monthly payments on the old mortgage and the new mortgage plus information about the amount of time required for the homeowner to recoup closing costs.

When Credit Scores Drop

Most homeowners believe a drop in interest rates should immediately signal that it is time to re-finance the home. However, when these interest rates are combined with a drop in the homeowner’s credit score, a re-finance 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 how low interest rates have dropped, the homeowner could still benefit from re-financing, even with a lower credit score, if he/she can get approved for any of the special programs which are offered periodically or via a government-insured program (e.g. FHA). Homeowners may take advantage of free re-financing quotes to get an approximate understanding of whether or not they will benefit from re-financing.

Have the Interest Rates Dropped Enough?

Another common mistake homeowners often make in regard to re-financing is to re-finance 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 specific to each individual’s situation. Homeowners often make this mistake because they neglect to consider the closing costs associated with re-financing the home. These costs may include application fees, origination fees, appraisal fees and a variety of other closing costs. 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.

Re-Financing Can Be Beneficial Even When It is a Mistake

In reality re-financing is not always the ideal solution, but some homeowners may still opt for re-financing even when it is technically a mistake to do so. A classic example of this type of situation is when a homeowner re-finances to gain the benefit of lower interest rates even though he/she winds up paying more in the long run for this re-finance option. This may occur when either the interest rates drop is not enough to result in significant savings or when a homeowner consolidates a considerable amount of short term debt into a long term mortgage re-finance. Although many financial advisors may warn against this type of financial approach to re-financing, homeowners sometimes go against their advice and make a change which may increase their monthly cash flow by reducing their total debt. This type of re-finance is known as a “debt-consolidation” re-finance and the homeowner is therefore making the best possible decision for his/her personal needs.

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For more about 203k, please visit the HUD website. To find out if you qualify for 203k financing, visit a HUD-approved lender at http://www.unitednorthern.com/New_20_Jersey.html. Please send inquiries to Tony Phillips. For additional 203k mortgage sources and relevant information, please visit the recently launched B.K.HECM Home Loan search.

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