Function

• A home refinance refers to taking out a new loan to pay off your mortgage. Borrowers must apply for a home refinance loan with various lenders, who will evaluate the borrower's creditworthiness and offer an interest rate for the term the borrower seeks. The proceeds of the loan go toward paying off the old mortgage, and the borrower starts making monthly payments on the new mortgage. Some refinances allow you to borrow more than your current mortgage if your home has unleveraged equity, and you will be paid the excess. For example, if your home's value is $200,000 and you owe $50,000 on your mortgage, you could do a cash-out refinance for $90,000 and have the extra $40,000 paid to you.
  
  

Benefits

• Many people refinance their loans in order to take advantage of lower interest rates. Others refinance to change from an adjustable rate mortgage to a fixed rate mortgage to prevent the interest rate from rising in the future if interest rates increase. Another reason to refinance an adjustable rate mortgage is to obtain better terms. For example, when the introductory rate expires, you may want to refinance with a new adjustable rate mortgage to enjoy a few more years with a low introductory rate.
  
  

Time Frame

• When you refinance, you do not need to keep the same term as your existing mortgage, which can be a motivating factor in refinances. For example, if you have received a promotion and can afford much larger monthly payments, you may want to refinance with a shorter term to reduce the amount of interest you will pay. Conversely, if you are struggling to make your monthly payments, you may want to refinance to a longer term.
  
  

Considerations

• Not everyone will be better of by refinancing nor will everyone be eligible to refinance. If your home's value has fallen below the amount you owe, lenders may not be willing to refinance your home. Also, even if interest rates have fallen, if your credit score has dropped, you might not be offered lower interest rates than your existing mortgage. Lenders typically charge between 3 percent and 6 percent for mortgage refinances, according to the Federal Reserve.
  
  

Warning

• When you refinance, your home still secures the loan, which means that if you cannot repay the loan, the bank can seize your home instead. The Federal Reverse warns especially against using a cash-out refinance to pay off unsecured loans like credit cards because even though you may be able to get a lower interest rate, you risk your home. In addition, if your current mortgage has a prepayment penalty, that extra cost could wipe out any savings from refinancing, according to the Federal Reserve.