Refinancing can seem intimidating, but it’s not hard to navigate once you understand the basics of how a refinance works. The following questions and answers will get you off on the right foot.

How low must interest rates fall before it’s a good idea to refinance?

The standard answer is 2%, but there are many other factors to consider before you rush into a refinance. For example, it won’t make financial sense to refinance for that two percent interest savings if you’re going to sell the house in 6 months, and therefore won’t recoup the expense of the closing costs.

Also, you have to look at your personal goals to determine if a refinance might help you reach those goals sooner. For example, if you wish to pay off your home early and plan on living in your home long term, you may want to refinance.  Even if the rates only drop by a percentage point or if you wish to refinance from a 30-year to a 15-year loan, refinancing is a good option. You’ll pay down the principal faster with a 15-year loan, saving you on interest in more ways than one.

What’s the difference between a cash-out and standard refinance?

If you choose to cash out on your refinance, you will need to refinance for a loan that is greater than the value of your original loan. Once you refinance, you’ll get to cash out – meaning that you actually receive a lump sum-the amount of cash agreed upon. This is possible if you have built up enough equity and qualify for the larger loan. In a standard refinance, you simply change the terms or interest rate of the loan, which may change your monthly payments, but doesn’t result in you having access to more cash. You can also consider opening a line of credit while you refinance, which will allow you to borrow from yourself, assuming you have adequate equity.

What does it mean when they say you can “roll-in” as part of the refinance?

This is the option to add your closing costs into the balance of the loan so you won’t have to pay the closing costs up front, but will pay them off as you pay off the rest of the loan as part of your monthly payments. This is a great option for those who don’t have access to money for closing costs upfront.

Should you refinance your home to pay off other debts?

You’ll need to do a cost-benefit analysis to determine if this is indeed the best way to access cash for a project. Let’s say you want to pay off your auto loan. You’ll need to calculate:

• how much you’ll pay in closing costs
• what your monthly payments will be
• how much interest you’ll save on the auto loan

Once you’ve done those calculations, you should have a good idea of if refinancing is the right solution.

Do the same type of calculations to determine if this is a good way to finance home repairs (consider how much the renovations may increase your home value) or to pay for college (compare to interest rates on student loans) or to pay off debt (for example, how much you’ll save in interest on the credit card debt.)

To make those calculations a little easier, check out this refinancing calculator.

Will refinancing affect my Private Mortgage Insurance (PMI)?

If you discover you now have accumulative equity valued at over 20% of your total loan, you will be free from paying private mortgage insurance. Factor this saving into your decision (if it applies to your situation).

How will my home value or credit rating affect my ability to refinance?

At the time of the refinance, your home will be reappraised (unless your current lender has a very recent appraisal on hand) and your credit history will be examined. The lender will compare your home value with the loan amount proposed and will determine if you have enough equity built up and good enough credit to make a refinance a safe bet for the lender. If your home appraises high enough, and you look like a safe enough lender, you’ll be good to go.

Should you compare lenders when refinancing?

Your current lender may be able to give you a better deal (if your current lender is the same lender your loan originated with, and if they have a current appraisal on hand), but then again, they may not. It’s a good idea to compare lenders, asking about closing costs, points, appraisal fees, terms, and rates. When comparing lenders, try to keep your comparisons within the same month in order to protect your credit rating. Your credit rating can be affected if you have too many credit report checks over a long period of time, but a month of credit checks won’t hurt you one bit.

Now that you know the basics of refinancing, you can look into this option confident you’ll make the best decision for your situation.