Refinance your home and you could save thousands of dollars, but usually over a certain period of time.  When you refinance your mortgage you are actually taking out another home loan to pay off your existing one. The main purpose of refinancing is to get a lower interest rate and save money on your mortgage.

The main concern when refinancing your home is how fast you can recover the costs associated with closing the new loan. If you decide to move before that time period then you won’t see any benefit from the refinance. So how do you know if and when you should refinance your home?

The obvious answer is you should refinance your home when you can save money over the course of time that you will live in your home. You can calculate how long it will take you to recover your costs of the refinance by dividing all the cost associated with closing the new loan by the amount you will save each month. Remember when calculating the costs you need to include any mortgage points paid, closing costs, and PMI payments.

There are basically two types of refinancing options for your loan: cash out refinance and no cash out refinance. A cash out finance will allow you borrow extra cash above the current principal owed on your home. Most mortgage companies will allow you to borrow up to 80% of the home value. Typically people use this extra cash to consolidate high interest rate loans, build an addition to the home, do home improvements or pay off auto loans. Obviously a no cash out refinance provides you enough money to pay off the current loan at a lower interest rate. The usual amount you will be allowed to borrow on a no cash out mortgage is up to 95%.

Generally, most financial experts agree that you should only refinance your loan if you are getting interest rates 2 points lower than you currently are paying.