Sunday, October 2, 2011

Is Re-Financing Beneficial To You?

Since I am in the process of re-financing my mortgage, I thought this would be a good opportunity to write something about re-financing.  Whether or not re-financing is beneficial is a question many homeowners may have when considering re-financing.  Unfortunately, answering this question is rather complicated because the answer is not always the same.  There are some circumstances where a homeowner might examine the possibility of re-financing; these circumstances include drop in interest rates, improvement in a homeowner’s credit score, and changes in a homeowner’s financial situation.  Although re-financing is not necessarily warranted in these situations, it is certainly worth investigating. 

Drop in Interest Rates

Drops in interest rates often send homeowners rushing to re-finance.  This is often the case if you bought your home during a thriving Real Estate market when you financed at a rate that is now above the average.  However, the homeowner should carefully consider the drop in interest rates before making the decision to re-finance.  It is important to note that homeowners pay closing fees each time they re-finance; these fees include application fees, origination fees, appraisal fees, and a variety of other costs that may add up quickly.  Because of these closing fees, homeowners should carefully evaluate their financial situation to determine whether or not re-financing viable option.  Generally speaking, closing fees not exceed the overall savings and the amount of time the homeowner will need to retain the property to recoup these costs which should not be longer than the homeowner plans to retain the property.

Credit Score Improvements

When the homeowner’s credit scores improve, considering re-financing is warranted.  Lenders are in the business of making money and are more likely to offer favorable rates to those with good credit than to those with poor credit.  As a result those with poor credit are likely to be offered higher interest rates or adjustable rate mortgages.  Homeowners dealing with these circumstances may investigate re-financing as their credit improves.  The good thing about credit scores is that mistakes and blemishes are eventually erased from the record; as a result, homeowners who make an honest effort to repair their credit by making timely payments may find themselves with improved credit sometime in the future.

Lenders are willing to offer lower interest rates to those with higher credit scores.  This is why homeowners should consider re-financing when their credit score begins to show improvement.  During this process is the homeowner can determine whether or not re-financing is worthwhile.

Changes In Financial Situations

Homeowners should also consider re-financing when there is a significant change in their financial situation.  These changes may include an increase in salary as well as the loss of a job, or even a change in careers resulting in a decrease in pay.  In either case, re-financing may be a viable solution.  Homeowners who are making more money might consider re-financing to pay off their debts earlier.  On the other hand, those who are unable to fulfill their monthly financial obligations might turn to re-financing as a way of extending the debt and lowering their monthly payments.  This may result in the homeowner paying more money in the long run because they are stretching their debt over a longer period, but it may be necessary in times of need.  In these cases a lower monthly payment may be worth paying more in the long run.

Therefore, in times of lower interest rates, it may be a good idea for examine the idea of re-financing to take advantage of the lower interest rates.  It is also a good idea to examine this option when there are changes in your financial situation, whether it is improved credit scores, increases in pay, decreases in pay, or any changes in your financial situation.  Moreover, it is important to also examine possible impact as a result of possible re-financing.