Refinancing During Recession

The housing industry is currently in a slump that banks and other financial institutions are scrambling for ways to attract more customers and avoid foreclosure. The current practice of banks and other financial institutions to save housing and even the financial industry is to offer lower interest rates. Instead of the usual 6% interest rate for mortgage, most of the mortgage rates today are only in 5% which is a very good deal for most homeowners.

But the rate is not only based on new houses. This new rate can also be considered for refinancing. Homeowners can actually reduce their interest rate of their mortgage through refinancing.

If you’re currently thinking of refinancing your property, better think about it first. Although at first glance you’ll have a great deal through refinancing, you’ll end up spending a lot more in the long run.

When to Consider Refinancing

There are certain scenarios wherein refinancing is highly recommended. If you’re current rate is within 2% more than the new refinancing rate they you should consider refinancing as soon as possible. A 6.9% in interest rate is never good. Even though you are in bad credit rating, you can find a bank today that will be more than willing to offer you a lower interest rate after refinancing.

When the difference in the interest rate is less than 2%, it is still possible that you can opt for refinancing. However, you need to make sure that you are staying in the same property for a very long time. The reason for this is that refinancing with a lower difference in interest rate will take lot longer to recoup the spending.

Remember that you might face certain penalties if early payment in your mortgage. If you’re just planning to pay off your mortgage in less than two to three years, then refinancing will not work to your advantage.

When to Avoid Refinancing

There are many reasons why you need to avoid refinancing. One of them is the cost of refinancing. There are companies that will ask you to shell out $2,000 as soon as possible to get start the process of refinancing. You can pay that in advance or you can add it to your payment in refinancing. But it will gather interest that the current refinancing loan is almost the same as the original mortgage loan.

Another reason to avoid refinancing is taxes. If you have lower interest rates, there is a great possibility that you will be paying higher taxes. Your interest rate in your mortgage could be used as deductibles but since you are already enjoying a lesser interest rate, you will have to pay a lot higher than you had in your taxes.

Inflation should also be greatly considered. Spending that money on refinancing will not only reduce your source of funds but it will continue to haunt you for a very long time because of the interest rate. But if you place that money in investments (even in low risk investments), you should be able to earn a lot more rather than reducing the interest rate of your current mortgage.

You might even increase the investment to more than 10% annually if you just know where to place the investment and how to improve it. The 10% increase in investment is a lot better compared to 1% - 2% reduction of your mortgage payment.

Refinancing is a great option for those who wanted to reduce their interest rate in mortgage. But just like most major financial transactions, going through refinancing should be thought of since there could be more financial trouble than ease when a property owner goes through refinancing.