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This is a fact that when the interest rates drop, many homeowners think of re-financing. However, sometimes it is a wrong decision  and homeowners can actually make a significant financial mistake by re-financing.

There are couple of examples as why sometimes re-financing is the wrong decision?  The first one is  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. Another example is when the interest rate has not dropped enough to offset the closing costs associated with re-financing.

Before re-financing your home, you need to determine how long you would have to retain the property to recoup the closing cost. This is very important especially in the case where you want to sell your property in the near future.

There are re-financing calculators readily available which will provide homeowners with the amount of time they will have to retain the property to make re-financing worthwhile. 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 also supplies information about the amount of time required for the homeowner to recoup the closing costs.

Most homeowners believe a drop in interest rates should immediately signal that it is time to re-finance the home. However, 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.  So if you are one of them, then you should carefully consider you 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, you may still benefit from re-financing even with a lower credit score but it is not likely. You may take advantage of free re-financing quotes to get an approximate understanding of whether or not they will benefit from re-financing.

Another common mistake homeowners often make in regard to re-financing is re-financing whenever there is a significant drop in interest rates. This can be a mistake because the homeowner must first carefully evaluate whether or not the interest rate has dropped enough to result in an overall cost savings for the homeowners.

They need to consider the closing costs associated with re-financing the home. These costs may include application fees, origination fees, appraisal fees and a variety of other closing costs. These costs can add up quite quickly 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”

In reality re-financing is not always the ideal solution, but some homeowners may still opt for re-financing even when it is technically a mistake to do so. This classic example of this type 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 occur when either the interest rates drop slightly but not enough to result in an overall savings or when a homeowner consolidates a considerable amount of short term debt into a long term mortgage re-finance. Although most financial advisors may warn against this type 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 decision for his personal needs.

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