Even though the housing market has somewhat stabilized over the years, many home owners are still concerned that the worst could happen: that they could suddenly lose their job as well as their ability to pay their mortgage, thus leaving their home vulnerable to a short sale or worse, foreclosure.
For a lot of people, the most obvious way to avoid this future is to refinance their mortgage, particularly when interest rates are especially low. But when is this really the best time to refinance or are their other factors that make it far more worth it to refinance?
Let's take a look
In the basic sense of the word, refinancing gives a home owner the ability to pay off their existing loan in exchange for a new one. The purpose is to get a better rate, decrease the amount of time a person has to pay on the loan or even decrease the amount paid. While appealing, refinancing may not be the best option for some people.
When is it a bad idea to refinance?
If you've had a significant change in assets.
Tapping into your savings account to pay off a credit card or shuffling money around to bolster a retirement account are great ideas. Unfortunately, they may also suggest a red flag to bank lenders who may not want to lend if they see this activity.
If your credit score has decreased significantly.
Trying to refinance after suffering a significant hit to your credit score may not be possible for everyone. Banks could see this as a red flag and reason enough not to give you a new loan.
If there are doubts about the stability of the housing market.
Although interest rates may be falling, this doesn't necessarily indicate that rates will continue to fall for much longer. So while it may seem like a good idea to refinance to an adjustable rate, this might not work in your favor if interest rates start to climb again.
If you have difficulty controlling credit card spending.
Some people use the equity in their home to pay off credit card debt and improve their credit score. Unfortunately, some people easily fall back into old spending habits that lead to high levels of debt again anyways, basically negating the benefits the refinance would have had.
Talk to an attorney
Even though a lender or financial expert can explain when it's best to refinance on your home, only a lawyer with experience in real estate matters can explain the complexities of the law and how to navigate the process. As such, you may want to consult with an attorney before starting down the road to refinancing your mortgage.