When to Refinance A Loan
Credit Scores, Changed Financial Situations, Dropping Interest Rates
Many times over the years, homeowners may find themselves wondering whether or not to refinance. Essentially, that means taking out another home loan to repay their current home loan. This might seem like an odd idea until you realize that it can result in significant amount of savings over the course of the loan. However, timing is the key factor when considering refinancing and the best time is when the potential exists for overall savings. The main factors to consider are: the homeowner's current credit score, their financial situation and national interest rates. We will explore in this article the role of each of these factors as they relate to refinancing your home.
Credit Scores
Most of us dream of owning our own home. In today's market, home loan options abound. Even people with poor credit are likely to find a lender. However, unless a borrower has good credit, they will most likely be offered unfavorable loan terms such as high or variable interest rates, rather than fixed rates. Lenders regard these homeowners as higher risk than others, due to their poor credit scores.
On the plus side, those with poor credit can repair some credit mistakes over time. Blemishes such as bankruptcies vanish after a number of years and other blemishes such as frequent late payments can be minimized by repaying debts, and doing so on time.
Once a homeowner's credit score improves, that's the time to inquire about refinancing their current mortgage. It is essential for homeowners to know where they stand, credit-wise. Everyone is entitled to a free annual credit report, available from each of the three major credit reporting bureaus. Once their credit score is up to par, homeowners should consider contacting lenders to investigate the rates and terms being offered.
Changed Financial Situations
Whether a homeowner begins to make considerably more money due to a job change, or less money due to a career change or being laid off, an investigation into the options of re-financing is warranted. An increase in pay may allow a homeowner to obtain a lower interest rate, while the loss of a job or a cut in pay may enable them to refinance and consolidate their debt. Though the homeowner may have to pay more, since some debts are drawn out over a longer period of time, a resulting lower monthly payment can be a welcome benefit.
Dropping Interest Rates
When interest rates drop, multitudes of homeowners run to their lenders to discuss their options for re-financing their homes. While lower interest rates promise an overall savings over the course of the loan, refinancing the home is not necessarily warranted. Homeowners should be looking carefully at the closing costs involved in refinancing and determine whether or not they exceed the overall savings advantage gained from a lower interest rate. Naturally, if the cost of refinancing is higher than the savings in interest, the homeowner would actually lose money in the process. Fortunately, there are many websites on the Internet that provide time-saving calculators to help you do the math.
Before you make any financial decisions on refinancing and using your home as collateral make sure you review all your options and get good council if needed.
Information on this site is provided for informational purposes only.
