Many homeowners make the mistake of thinking re-financing is always a workable option. However, this is not true and homeowners can in fact make a significant financial mistake by re-financing at an inopportune time. There a couple of classic example of when re-financing is the fault. This occurs when the homeowner does not stay in the property long enough to recoup the cost of re-financing and when the homeowner has had a credit score which has dropped since the original mortgage loan. Additional examples are when the interest rate has not dropped sufficient to offset the closing costs associated with re-financing.

Recouping the Closing Costs

In determining whether or not re-financing is valuable the homeowner should decide how long they would have to retain the property to recoup the closing costs. This is significant especially in the case where the homeowner intends to sell the property in the near future. There are re-financing calculators readily obtainable which will provide homeowners with the amount of time they will have to retain the property to make re-financing useful. These calculators require the user to enter input such as the balance of the existing mortgage, the existing interest rate and the new interest rate and the calculator return results comparing the monthly payments on the old mortgage and the new mortgage and additionally supplies information about the amount of time required for the homeowner to recoup the closing costs.

When Credit Scores Drop

The majority of homeowners believe a drop in interest rates should directly signal that it is time to re-finance the home. Still, when these interest rates are combined with a drop in the credit score for the homeowner, the resulting re-financed mortgage may not be favorable to the homeowner. Consequently homeowners should carefully take into account their credit score at the present time in comparison to the credit score at the time of the original mortgage. Depending on the amount interest rates have dropped, the homeowner may still take advantage of re-financing even with a lower credit score but it is not expected. Homeowners may take advantage of free re-financing quotes to get an near comprehension of whether or not they will derive benefit from re-financing.

Have the Interest Rates Dropped Enough?

Another common fault homeowners often make in regard to re-financing is re-financing whenever there is a considerable drop in interest rates. This can be the fault since the homeowner must first carefully estimate whether or not the interest rate has dropped sufficient to result in a general cost savings for the homeowners. Homeowners often make this mistake since they ignore to take into account the closing costs associated with re-financing the home. These costs may involve application fees, origination fees, appraisal fees and a variety of other closing costs. These costs can add up rather fast and may eat into the savings generated by the lower interest rate. In some cases the closing costs may even exceed the savings resulting from lower interest rates.

Re-Financing Can Be Beneficial Even When It is a “Mistake”

Actually re-financing is not every time the ideal solution, but some homeowners may still opt for re-financing even when it is technically a fault to do so. This typical example of this category of situation is when a homeowner re-finances to gain the benefit of lower interest rates even though the homeowner winds up paying more in the long run for this re-financing option. This may happen when either the interest rates drop slightly but not sufficient to result in an overall savings or when a homeowner consolidates a significant amount of short term debt into a long term mortgage re-finance. Although the largest part of financial advisors may warn against this category of financial approach to re-financing, homeowners sometimes go against conventional wisdom to make a change which may increase their monthly cash flow by reducing their mortgage payments. In this situation the homeowner is making the best possible choice for his personal needs.

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