Refinancing Your Mortgage?

Four Questions You Should Ask.

Refinancing your home should not be done lightly. It is a big decision.If you decide to do a refinance on your home, here are four questions to consider.

They are:

• How long is your payback period?

• How much will your interest rate drop?

• Are you planning on moving within one or two years?
• Will you be able to find a lender to refinance your home?

The payback period is the time necessary to recover your costs of refinancing.  The costs of refinancing can include many fees. Lawyers, appraisers, and banks will all charge for their services. Because refinancing and closing costs  differ for each state, you will need to research the costs for your area to find out what is included.  In some situations the refinancing fees can be rolled into the new mortgage eliminating large out-of-pocket costs.

You need to fully understand how much your interest rate will drop.  Typically you want your interest rate to drop by at least 2%.  If it is less than 2% the costs to refinance may not justify refinancing your loan. The costs of your refinance would require a significant passage of time to recoup what you pay.  Which brings us to the next point.

A refinance is nothing more than an investment of time, hoping for a better return on the money(closing costs) you put up. Moving within one to two years, will not allow you to be able to recover your refinancing costs and make a decent return on your investment. You need to be well aware of what your plans are for housing. Are you staying put for the next few years or not? The answer to that question will determine if a refinance makes sense for you or not.

As you look for a lender, you will soon discover, they like to cover their investment (their loan) with an asset of greater value. They do this by loaning only up to a percentage of your property's value. Unless they are a high risk lender (or someone else is guaranteeing your loan...read "Uncle Sam") most lenders want to loan as small a percentage of the value of your property as possible. This results in a low loan-to-value ratio or LTV. 
LTV  is the amount of the loan compared to the appraised value of the property. For example a lender will only lend if the loan is, 90% or less than the appraised value of your property. Of course, each lender has their own loan-to-value threshold. If the loan-to-value ration is more than the lender allows, you will be required to bring more cash to the table.

If it done correctly and wisely, a home refinance can save thousands of dollars in interest over the life of the loan. Chances are you have family or friends who have gone through the process of refinancing a home and may be able to refer you to a lender who can help you answer the above questions. You need to do so if you want to make an informed decision. It's your money, don't do it any other way.