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Knowing When to Refinance

When times are tough, the first thought one may have is to try to obtain a loan.  In this difficult economy, a home loan may be just the answer.  In fact, if one owns a home, the best thing to do if he or she needs money for whatever purpose, he or she can refinance his or her home loan.  Refinancing is relatively painless and involves restructuring a loan with a different interest rate that will change the monthly loan payment that one has to make.

The first thing to do is verify the interest rate associated with one’s existing home loan.  It is also beneficial to check into what interest rates are being offered for new home loans as well.  It may not make any sense to refinance one’s existing home loan if there is not at least a one and a half or two point difference in the interest rates.  One may not be any better off refinancing without this point difference because to refinance one will still have the same fees to pay that were paid when he or she first got his or her loan, such as the valuation, inspection, and lender’s fees. 

If one is thinking of refinancing with a different lender or he or she has had the existing home loan at least for two years, he or she will probably have to pay new origination fees.  If he or she has made any kind of renovations to the property, a new inspection and valuation will also have to be performed.  Other nominal fees may also be associated with refinancing a home loan.

It is important to keep these fees in mind when evaluating whether or not to refinance, because it may not be a major savings that one sees just because he or she is refinancing.  It can take several months or even years to see a gain from the light change in interest rates.

As crazy as it sounds, many lenders will charge fees if a borrower pays his or her loan off early as a result of refinancing with a different lender.  This added to the inevitable costs of refinancing charged by the new lender can all add up in the long run.  Many times it is simply better to budget and stick with the original loan and lender.  At the very least, one should weigh all the costs associated with refinancing before taking that step.

At this point, one may be wondering then if it is ever a good idea to refinance.  The answer is yes, there are many times that refinancing makes perfect financial sense.  If one has significantly raised the value of his or her home by extensive remodeling or renovations, then the equity in the home may qualify one for a much more improved interest rate.  This can also mean significantly lower monthly payments on the loan as well.  Many times, people will refinance just so that they can make these improvements to their homes for better rates in the future.

In the end, only the individual can know whether this will be good for his or her financial future or not.  Making the decision to refinance is a personal one, and if he or she plays the cards right, he or she can save a lot of money down the road.

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