Whether or not to re-finance is a question homeowners may ask themselves many times 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. It is important to realize that when done properly, it can result in a significant cost savings.
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 if it is time to re-finance.
When Credit Scores Improve
There are currently so many home loan options available. 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.
Fortunately for those with poor credit, many credit mistakes can be repaired over time. Some financial blemishes, such as bankruptcies, simply disappear after a number of years. 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 considerable, 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. This can 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
A change in the homeowner’s financial situation can also warrant investigation into the process of re-financing. A homeowner may find himself making considerably more money or considerably less money. 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.
Alternately, a homeowner who loses their job or takes a pay cut may hope to refinance and consolidate their debt. This may result in the homeowner paying more. 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 dropping is the one signal that sends many homeowners rushing to their lenders. Lower interest rates are certainly appealing. 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. They will want 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. They may actually lose money in the process.
The mathematics associated with determining whether or not there is an actual savings is not overly complicated. 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. These can help homeowners to determine whether or not re-financing is worthwhile.