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When to refinance a home loan? This question is a difficult decision for many home owners.

  Do you need cash?

Possibly to pay off debt or to get some cash on hand. Most refinancing will allow the borrower to get 80% of their homes value in a cash out refinance. However, If the loan is a fha a cash out will allow for 85% and a VA will allow for 90% to be borrowed. If the current mortgage meets or exceeds the 80% LTV than alternative products are available to get cash using the remaining equity in the home. This loan usually is not offered at a prime rate and may even be a second mortgage.

• If you want to lower your term or rate

Shorten or extend the term. If there is a desire to pay the mortgage off sooner than maybe shortening the term of the loan and increasing the payment will pay it of sooner. Typical terms are 10.15.20.25.30 years and they may also be longer amatorizations on balloon loans. This mean a 15/30. The loan payments ar4e broken down over 30 years but the loan is due in 15. Meaning at the end of the 15 year term the loan remaining balance is due in full (of course it can be refinanced and not paid off)

Lowering a interest rate during a refinance will not always make your payment less. Most often the shorten terms on the loan give lower interest rates. But the term is cut, so the payments will go higher even though the rate is lower.

The closing cost or the additional cash out may cancel out the lowering of a rate. A good rule of thumb is to know for every thousand added to the principle in a refinance mortgage the payment will go up about 7 -12 dollars a month. So, by lowering a rate by 1/2 of a percent but rolling several thousand dollars may actually end up increasing the payment. It all depends on the exact loan refinance type.

• What to look out for

Be careful with the closing cost. Sounds like a no brainier but more often than not the language can be confusing and the borrower may pay unnecessary fees. If the fees in a refinance are high any savings could be lost due the closing cost eating up the equity.

Items like Origination, Brokers Fees, Discount Points are all considered points. But because of the varying name in what points can be called, confusion can arise.

• Know the refinance market before you refinance

The current key terms to look out for before refinancing is the yield on the ten year treasury bond. As the yield moves down usually mortgage rates do also.  

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