Whether or not to refinance is a question a homeowner may ask themselves many times during their stay. Refinancing is essentially using a home loan to pay off an existing home loan. This may sound odd, but it is important to recognize that if done correctly, it can result in significant savings for the homeowner over the life of the loan. When overall savings are possible, it may be time to consider refinancing. In some cases, refinancing can be worthwhile. These situations may include when a homeowner’s credit score improves, when a homeowner’s financial situation improves, and when national interest rates decline. This article will examine these situations and discuss why they may require refinancing.
When credit scores improve
With so many home loan options available, it is possible for even those with poor credit to find a lender that will help them realize their dream of buying a home. However, those with poor credit are likely to be offered unfavorable loan terms, such as high or variable interest rates, rather than fixed rates. This is because lenders consider these homeowners to be a higher risk than others due to poor credit.
Fortunately for those with poor credit, many credit mistakes can be repaired over time. Some financial stigmas, such as bankruptcy, simply disappear after a number of years, while others, such as frequent late payments, can be reduced by maintaining a more favorable debt repayment history and demonstrating the ability to pay off existing debts.
When a homeowner’s credit score has improved considerably, the homeowner should inquire about the possibility of refinancing their current mortgage. All citizens are entitled to a free annual credit report from each of the three major credit reporting agencies. Homeowners should use these three reports to check their credit annually and determine if their credit has increased significantly. When they notice a significant increase, they should consider contacting the lender to determine what rates and terms they may be willing to offer.
When financial circumstances change
The refinancing process also needs to be investigated when a homeowner’s financial situation changes. A homeowner may find themselves making more money due to a change in employment, or a lot less money due to a layoff or change in career. In either case, the homeowner should investigate the possibility of refinancing. Homeowners may find that an increase in wages may allow them to obtain a lower interest rate.
Alternatively, homeowners who lose their jobs or take a pay cut due to a career change may want to refinance and consolidate their debt. This may result in the homeowner paying more because some of the debt is drawn over a longer period of time, but it can result in a lower monthly payment for the homeowner, which may be advantageous over the course of his or her life.
When interest rates fall
Falling interest rates are a signal that makes many homeowners eager to discuss with their lenders the possibility of refinancing their homes. Lower interest rates are certainly appealing because they can result in overall savings over the course of the loan, but homeowners should also realize that it is not necessary to refinance a home every time interest rates drop. The caveat to refinancing with lower rates is that homeowners should carefully evaluate the situation to ensure that the closing costs associated with refinancing do not outweigh the overall savings benefit gained from obtaining a lower rate. This is important because if the cost of refinancing is higher than the interest savings, the homeowner will not benefit from refinancing and may actually lose money in the process.
The math associated with determining if there are actual savings is not too complicated, but it is possible for a homeowner to make a mistake in these types of calculations. Fortunately, there are calculators available on the Internet that can help homeowners determine if refinancing is worth it.