There are three main reasons to refinance: save money, borrow cash against your equity or a combination of the two.

If you’re trying to save money by reducing your monthly payments, you need to divide cost of getting the loan by the monthly payment savings. This will tell you how many months it will take for you to "break even" and start saving money. If you plan on staying in the home past the time frame shown, you should refinance. Here’s a good rule to follow:

If the "break even" point is…

Under 36 months: Good time to refinance

36 to 60 months: Consider options carefully

60 months or more: Best to wait and refinance later

If your overall goal is to refinance to a shorter term loan (for instance going from 30 to a 15 year mortgage) to pay your house off faster, be sure the rate is dropping enough to recover the costs as if the refinance was a 30 year loan. If it doesn’t, you should just start pre-paying principle on your current loan at the 15 year payment amount instead of refinancing and paying costs.

You can get cash for any purpose you want: home improvements, pay off debts, family needs - there are no restrictions based upon how the cash will be used. The common 30-yr fixed first mortgage allows you to borrow up to 80% of the appraised value for the refinance loan amount.

The two most common ways people choose to refinance for cash are with a Home Equity Line of Credit (HELOC) or a Home Equity Loan.

A HELOC is a revolving line of credit that allows borrowers to obtain a predetermined amount of money drawn against the equity of their home. (Think of it as a "credit card" secured by a mortgage or deed of trust on the property). Borrowers will be approved for a specific amount of credit (their credit limit), which is the maximum amount of money they can borrow at one time. The credit limit is normally set by the lender based on a percentage of the home’s appraised value and subtracting that from the balance still owed on the first mortgage. Additional factors will also be used to determine a credit limit such as: income, debts, credit history and ability to make payments. HELOC funds can be accessed by special checks or a credit card.

Many HELOC plans have fixed periods known as "draw" and "repayment" periods - both typically 10 years in length. During the draw period the borrower is able to borrow money (and some plans call for payment in full by the end of this period). Other plans that use a repayment period ask that the money be paid over this fixed amount of time.

A HELOC is good for borrowers who desire a lower up-front rate and access to money at unpredictable times. Borrowers will only need to pay back the amount of money that is actually used from the line of credit and they only face credit reviews on a 1 to 3 year basis. Competition among lenders has encouraged the growth of introductory "teaser" rates and other incentives.

A Home Equity Loan is an example of a second mortgage. Borrowers receive a check for the entire loan amount and will need to make payments on the loan until it’s paid off.

Home Equity Loans are a good choice for borrowers who need a specific amount of money and payment stability. These are fixed rate loans which allow borrowers to lock-in the interest rate for the entire life of the loan. Unlike a HELOC, there are no annual (or "maintenance") fees associated with this type of loan.

For more detailed information about the refinancing process and different financing options, please contact a CUHLC experienced loan officer. They can help you evaluate your current financial situation, your long term goals and help you make the best decision possible.