If you’ve been homeowner for a few years or more than a decade, you may consider refinancing your home loan when #mortgagerates dip. If you’ve never refinanced before, there are a few basic facts you need to know before deciding if it’s right for you.

Refinancing Basics

When you’re refinancing, you’re applying for a new loan. And whether you use the same lender or another lender, you’ll be subject to complete documentation and verification of your income, your assets, your debt-to-income ratio, your credit profile and your job history. Not only do you have to qualify for the loan, but your house must appraise for enough value to support the LTV or Loan-To-Value.

Refinancing also costs money: closing costs vary by location but average 2% to 3%, or $4,000 to $6,000 on a $200,000 loan. Even a “no-cost” refinance costs money you pay through a higher interest rate, a larger loan balance or the payment of discount points.

Refinancing Rule of Thumb

Payback Period – Divide the cost of refinancing by the monthly payment reduction, which will give you your payback period. This will help you determine if you will recoup your money during the time you plan to stay in the home.

For example: A refinance will cost $5,000 and the monthly payment will be reduced by $101.26 per month.

$5,000 ÷ $101.26 = 49.38 months to recover the cost of refinancing.

 If you plan to stay in the home longer than 4 years this would be a good financial decision.

There are many factors that go into making a refinancing decision and this is just a brief overview. Once you understand this, read Common Mistakes in the Refinancing Decision which discuss technical issues that are often overlooked.