Many homeowners make the mistake of thinking that refinancing is always a viable option. However, this is not the case, and homeowners who refinance at the wrong time can actually make significant financial mistakes. There are several classic examples of refinancing being a mistake. This occurs when a homeowner does not stay in the property long enough to recover the cost of refinancing, and when the homeowner’s credit score drops after the initial mortgage. Other examples are when interest rates do not drop enough to offset the closing costs associated with refinancing.
Recovering Closing Costs
In determining whether refinancing is worthwhile, homeowners should determine how long they must keep the property to recover closing costs. This is especially important if the homeowner intends to sell the property in the near future. There are readily available refinance calculators that can provide homeowners with the amount of time they must keep the property in order to make refinancing worthwhile. These calculators require the user to enter information such as the balance on the existing mortgage, the existing interest rate and the new interest rate. The calculators return results comparing the monthly payments on the old mortgage and the new mortgage and provide information on how long it will take for the homeowner to recover closing costs.
When credit scores drop
Most homeowners believe that a drop in interest rates should immediately indicate that it is time to refinance their home. However, when these interest rates are combined with a homeowner’s declining credit score, the resulting refinancing of the mortgage may be detrimental to the homeowner. Therefore, homeowners should carefully consider how their current credit score compares to the credit score they had at the time of the original mortgage. Depending on how much interest rates fall, homeowners may still benefit from refinancing even with a lower credit score, but this is not possible. Homeowners can use free refinancing quotes to get a general idea of whether they could benefit from refinancing.
Have interest rates dropped enough?
Another common mistake homeowners make when it comes to refinancing is refinancing when interest rates have dropped significantly. This can be a mistake because homeowners must first carefully evaluate whether interest rates have dropped enough to result in overall cost savings for the homeowner. Homeowners often make this mistake because they overlook the closing costs associated with refinancing a home. These costs can include application fees, origination fees, appraisal fees and various other closing costs. These fees can quickly add up and can eat up the savings from low interest rates. In some cases, closing costs may even exceed the savings from low interest rates.
Refinancing can be beneficial, even if it’s a “mistake”
In reality, refinancing isn’t always the ideal solution, but some homeowners may still choose to refinance, even if it’s technically a mistake. A typical example of this type of situation is when a homeowner gets the benefit of a lower interest rate by refinancing, even though in the long run the homeowner pays more for this refinancing option. This can happen when interest rates drop slightly, but not enough to result in overall savings, or when a homeowner consolidates a significant amount of short-term debt into a long-term mortgage refinance. While most financial advisors may warn against this type of refinancing finance, homeowners sometimes go against conventional wisdom and make changes to increase their monthly cash flow by reducing their mortgage payments. In this case, the homeowner is making the best possible decision for his personal needs.