Homeowners may wonder if they should refinance many times over the years they live in their current home. Refinancing means to repay a current mortgage with a second mortgage. This may not seem to make sense, but there are benefits if the correct refinancing is done. Refinancing can save the homeowner a considerable amount of money. There are several circumstances when refinancing may be advantageous. The conditions this article will discuss are credit score improvement, financial circumstances changes and interest rate reductions.
Credit Score Improvement
There are lenders who will make home loans available regardless of a person’s credit score. Even those with a poor credit rating will likely find financing. Financing with a poor credit rating does come with its costs however. Higher interest rates will be charged as the lender will deem the homeowner to be an increased risk.
Poor credit reports can be repaired in a number of ways. If the credit rating is as a result of continually paying accounts late, a conscientious effort to begin making payments on time will gradually improve the credit rating. If bankruptcy was declared, this notation on the credit report will be erased after a certain amount of years.
The appropriate time for a homeowner to investigate refinancing is when their credit rating has improved significantly. Credit score improvement can be determined by requesting a report from all three major credit reporting bureaus. Everyone is permitted a free credit report annually. Homeowners should monitor their credit scores and, when there has been a considerable upgrade, contact various lenders to find out if they can obtain better rates and terms.
Financial Circumstances Changes
Personal financial circumstances play a large part in determining whether refinancing is advisable. If an homeowner’s earnings have increased substantially, the homeowner may qualify for a reduced interest rate and better terms.
Conversely, if the homeowner has taken a cut in pay or lost their job to layoff, it may be sensible to contact the lender to discuss refinancing. If the homeowner is in the position of not being able to make their financial commitments, the lender may offer a consolidation loan. A consolidation loan has the advantage of lower monthly payments but the disadvantage of costing the homeowner more in interest due to an extension of the payment schedule for debts. The advantages may outweigh the disadvantages for homeowners facing this situation.
Interest Rate Reductions
Reductions in interest rates motivates many homeowners to investigate refinancing. While the savings obtained by lower interest rates is alluring, homeowners should realize refinancing is not always beneficial at that time. Lenders charge fees for refinancing homes. The homeowner needs to determine whether the interest saved will more than cover the lender’s fees. If not, refinancing is not appropriate as the homeowner will sustain losses. However, if the interest saved exceeds the lender fees, the homeowner will want to carefully consider whether to take advantage of this.
There are online calculators available that will assist the homeowner in determining whether refinancing will save them money. The procedure is not complicated and will give accurate results.