When is it a Good Time to Refinance?
When is it a Good Time to Refinance?
Whether or not to refinance is a question people often ask themselves while they own real estate, be it their primary residence or a rental property. Refinancing is basically getting one mortgage loan to repay an existing mortgage loan. The phrase may seem strange or foreign to some people but it is important to realize that when this is done the correct way, it can be a substantial monthly savings over the course of the new mortgage loan. Homeowners should take note that when there is the potential for large savings it might be a possibly good time to refinance. There are generally good times when refinancing is worth all its hype. These times may include when your credit scores improve, when the borrower’s financial situation improves and when federal interest rates are dropping. At this moment, interest rates are dropping, so you have one situation in your favor already. Let’s see look more deeply into the other scenarios and learn why they could trigger a justifiable reason to refinance.
Borrower’s Credit Scores Improve
The home loan options are abundantly available even with the current slowing housing market. Borrowers with low or poor credit scores are still able to find a lender who can assist them in refinancing or buying a home. On the other hand, those with bad credit are likely to be offered unfavorable loan terms such as high interest rates or adjustable rates with high margins instead of fixed rates, also known as sub-prime loans. Lenders consider these potential homeowners and borrowers to be a higher risk than others because of their poor credit history as is evident in the housing slump currently.
Fortunately for people with bad credit, many credit mishaps can be repaired with time. Some negative marks on credit reports such as bankruptcies and foreclosures will be wiped off after 7 to 10 years while other negatives like always making late payments can be neutralized somewhat by consistently repaying existing debts on time based on the new FICO 08 system.
Once the homeowner’s credit score improves significantly, the homeowner should inquire about the possibility of refinancing their existing mortgage loan. You are entitled as a citizen to receive a free annual credit report from the three major credit reporting bureaus. Once you see an increase consider some lenders to see what rates and terms they offer and if it is in your best interest to refinance.
Financial Situations Change
A homeowner may begin to start making significantly more money because of a job change or bring in much less money due to a layoff. In either scenario, the homeowner should strongly consider refinancing for increased savings. In some case, a pay increase could allow the homeowner to receive a lower interest rate due to debt to income ratios being lower.
When Interest Rates Fall
When mortgage interest rates drop, it is one easy refinance indicator which brings many homeowners rushing to lenders and mortgage brokers to discuss refinancing their home. Lower interest rates can be very attractive due to the considerable savings over the course of the loan but homeowners should also realize that every time mortgage interest rates fall, a refinancing your home is not always necessary. Refinancing is a decision that the homeowner needs to analyze. This is a very important aspect because if the cost of refinancing is more than the savings, then the homeowner will not benefit by refinancing and could actually lose more money in the long run.
The calculations associated with determining whether or not there is an actual savings is not extremely complicated. Many experienced loan officers have these tools readily available and fortunately there are a number of online refinance calculators available online which can assist you in determining if refinancing is a benefit.
Mario Olivera is an investor and contributor with LoanShoppers and iJumbo Loan