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Deciding when is the best time to pull the trigger on a home loan refinance, as a rule of thumb, is not always clear. Refinancing seems like a new opportunity to get a better interest rate or perhaps even to take funds out of equity to use for your own benefit. The problem is, though, that refinancing can be costly in some situations. It is a good idea to know when to refinance and when it can cause you to end up spending more on your mortgage, rather than less.

What are good rules of thumb to refinancing? According to some experts, the following tips can help you to save money on refinancing. To learn when to refinance, consider the following:

How much is the new interest rate going to be? Most experts warn not to refinance unless the new rate will be at least one to two percent lower than what you are paying right now. Anything less than that and you may not end up saving as much (considering you have to pay closing costs on the new loan).  You must be able to compare the actual payment amounts if you want to accurately estimate if it’s a good idea to refinance. I do not fully agree with this as each situation is case by case. Sometimes 2% is not enough and sometimes .5% is a good refinances. It all depends.

Take your current loan product into consideration.  The type of current loan you have might make a huge difference.  For instance, if you have an ARM that’s at 5% currently, and can refinance into a fixed rate at 4%, this doesn’t make the 2% rule of thumb.  However the long term security of a fixed rate may be awfully attractive.  Things like mortgage insurance, loan terms and pre-payment penalties should all factor into the decision. Other exceptions apply.

Are you planning to remain in the home at least five years? If not, then refinancing may not help you to save any money. To save money on a refinance, you must stay in your house longer than the break-even period – the period over which the interest savings just cover the refinance costs. But again, call me because sometimes we have options where we can absorb costs because your break even must be within 6 months or 12 months or immediate, whatever the case may be.

 How much equity do you have in your home? If you plan to withdraw that equity, or some of it, to consolidate debt or to do home improvement projects, plan to have at least 20 percent in place. Some lenders will not allow you to borrow up to 100 percent of your home’s value, either. Some programs allow 85% while some max out at 75%.

 Do you have good credit? You may not qualify for a lower interest rate loan or save money overall if you do not have good credit. The better your credit is, the less you will pay to get a loan. If you have bad credit, it is likely that refinancing will be more difficult and will cost you.

 Know your goal. Do you want a lower monthly payment? If so, you may pay more in the long term. Do you want to pay off your loan sooner? Try reducing the term and getting a lower interest rate, too. Ensure that you can accomplish your goal.

Don’t be afraid to ask for qualified advice

The fact is if you cannot save money, then it probably doesn’t make sense to refinance. Otherwise, it may cost you more in the long term and not make any sense for you to pay the closing costs on a new loan.

The rules of thumb are great for weighing the pros and cons – but remember, they are just guidelines.  You should never make a decision as important as whether or not to mortgage your home based on general ideas, and that’s why we recommend taking the time to sit down with your favorite loan officer and get the facts. And in this situation, it’s important to be cautious with advice from friends and family members as it’s just that – free advice. 

Cash out refinancing is a way that you can borrow money against the investment you have in your home by refinancing more than the balance you owe on your home mortgage. It’s important to remember that this is, in fact, a loan. It’s not a profit that you’re making off of your home and is definitely not “free money”. That being said, there are some significant benefits that you may be able to take advantage of by using this form of refinancing.

Benefit #1: Money

The most significant benefit is the money you walk away with. The cash out is literally money in your pocket. The amount that you’re allowed to borrow will depend upon the company you’re working with and your credit worthiness. In some cases, you may be able to borrow a high portion of what the home is worth (as much as 85% LTV) and, in some cases, you may have to settle for 70 or 80 percent of the home’s value in the total amount of the refinance.

The actual sum of the money you walk away with depends on how much you refinance for and the difference between that amount and the value of your house. You pay off the balance on your mortgage with the money you refinance and walk away with the balance in your pocket.

Benefit #2: Interest Rate Savings

You may be able to get a lower interest rate by refinancing. This is a strategy that some people use to offset what they’d pay in interest if they kept their current loan. For instance, if you owed $100,000 on a home and had a bad interest rate, you may find that refinancing the home for $120,000, paying off the $100,000 and using the additional $20,000 to pay off other bad loans may get you out of some interest debt that’s coming down the road. This is a rather popular strategy and can save you thousands in interest payments.

Benefit #3:  Taxes

If you use the money you get out of your cash out refinance to pay off credit cards or other debt, you may be able to basically transfer that debt to a form—your mortgage debt—that can be written off of your taxes in part. This means that you get more out of the money you pay toward your debts and also means that you can get out of some very common credit traps.  You should consult your NOLA Loan Officer as well as your tax advisor to find out what’s best for you!

Some people also use these loans for home improvements, which is a way to bring up the value of the home and, if you plan on selling it, a good way to finance improvements that may end up netting you more out of the sale.