Home Loan Refinance:

If you have a home loan, and you think that your property went up in value by ten percent or more since your took out your current loan, you might be a good candidate to refinance. It can save you money on your mortgage payments; improve your terms, or both. Here is why:
When you take out a home loan, bank uses your home as collateral for the loan. The more expensive the collateral is, the lower the bank’s risk that you will default on the loan and walk away from that collateral. So, if over the years, the collateral grows in value, bank’s risk is reduced and therefore you should be able to qualify for a lower rate. If your home went up in value by ten percent or more, banks will consider your home loan to be a less risky investment, and therefore should be able to offer you a lower rate. This is assuming that you kept the same job and income, made all of your payments on time, and market interest rates are the same or lower.
Lower interest rate can benefit you in several ways. You can either refinance and lower your monthly payments, or refinance into a shorter loan term, which means you would be making the same monthly payment, but you would pay off your home sooner. For example, if you have a 30 year fixed loan, you could refinance it at a lower rate in to a 25 or even 20 year loan, and keep your payments about the same.
Before deciding to refinance your home loan, you need to consider the cost of doing the refinance, and then compare it to savings. If it is costing you $5,000 to refinance, and your savings are only $25 per month, it is not worth it because it would take you over 16 years to just brake even. But if your savings are $250 per month, or 5 years worth of mortgage payments, it is probably a good idea to refinance you home loan at that time.

Its time to refinance my home?

If you are trying to figure out when to refinance a home, there are few things one must consider. It depends if you are trying to free up some money every month, take advantage of a better interest rate, or generate enough money to make some improvements on your home. Most people just want a clear cut answer, but there is not one. Each person’s financial situation varies, and this is why there is a difference on when to refinance a home.

Let’s look at the first situation: Freeing up monthly income. Sometimes, people take certain loans just to be able to get into a house. It could be because of credit history, or your income does not qualify for the house. Both of these scenarios can cause for a higher interest rate. You will probably need to be in the house for at least 2-3 years before you can refinance. Reason being you need to build some equity. Or, if you can pay a down payment on the refinance, then you could refinance earlier. You need to look at the interest rates, and if any points are required to be paid.

If you are doing this because of interest rate, then you need to look at how much it is costing you to refinance (points). Then figure out the difference you are saving each month. Take the cost, and divide by the amount you are saving. This gives you the number of months you need until you break even on the cost of the refinance amount. If you plan on being in the house for a while, this will show you how much you will save over the long run. If you plan on selling in 3-5 years, you might not want to refinance. The number of months will show you when to refinance a home.

Another reason is to get some cash out of the equity. This allows for you to make home improvements, which in turn will add some value to your house (pending on what it is). For example, a new pool adds no value to a home price. Where as, an updated kitchen with new appliances will ad value to a house. If you really are not looking to sell, then you do not need to worry about value part. But, if you will sell in 3-5 years, you might want to look at how much the new loan will cost you over the next few years, and how much you expect to make when you sell it.

As you can see, there really is not a clear cut answer to when to refinance a home. It varies person to person. Your best bet is to read and ask as many questions as you can. This will give you some knowledge before you let a finance person tell you when to refinance a home.