Home Refinance - The Questions You Should Ask First

Any kind of home refinance is a huge decision.

If you are seriously considering it, please consider 4 important questions before you make you decide to sign on the dotted line. The 4 points are simply, the length of the payback period, the decrease in interest rate, if moving is something that may happen in the near future, and if you can actually find a lender that will do the refinancing. Let's talk about why these points are so vital.

Refinancing obviously is not free. There are costs and fees involved. Your lawyer, appraiser and bank will all want their cut of the deal. These cost differ from state to state so you'll need to do a little research to find out what your costs will be. There are even cases where the fees can be simply placed on the new mortgage. That's why the payback period is so important. You need to know how long it will take to recover these costs that you'll likely be paying up front.

As far as the interest rate drop is concerned, there's a rule of thumb but it is not hard and fast. Still, typically it's best to have the rate fall by 2 percent or more. Anything less and the previously mentioned fees may not make refinancing worthwhile.

If a move is in your future you should also think twice, especially if that planned more will happen in the next two years. Anything sooner, and you'll most likely never recover the costs of refinancing, making it a very bad return on your investment.

Finding a lender is not always as easy as it seems either. What mortgage companies are interested in is something called LTV, which stands for loan to value ratio. What that comes down to is a simple comparison of the loan to your property's appraised value. Every lender is different in this regard. Some may only approve the home refinance if the loan is 90% or less than what the property is appraised for. Again, the percentage will differ. There are some ways around this however. For instance if your LTV ratio is too high, some companies will still refinance if you are willing to pay all the fees we talked about up front and in cash.

If you have friends or family that have gone through the refinance procedure, it doesn't hurt to get their recommendation on a lender. The right lender will help you answer the above questions and you'll be a more informed consumer when it comes decision time.

The bottom line is that a simple home refinance can be worth thousand of dollars in interest savings. But you must do it right.