The decision to refinance your mortgage is a big one, one that a lot of people really don't put enough thought into. It is very easy to refinance so most people think that it is no big deal, this is not the case. Used correctly a refinance can be a great financial tool that can really help you out. Used incorrectly it can financially ruin you.
The basics behind refinancing a mortgage are fairly straightforward and in reality it is not all that different from getting the mortgage in the first place. What you would do is get a new mortgage and then use the money from that loan to pay off the existing mortgage. Depending on how you structure the deal you may have money left over that you can use for other things. The reason most people refinance is to get this money the amount of which will depend on how much equity you have in your house. You can also refinance to reduce your payments or the total amount of interest that you will have to pay.
The reason that most people refinance is to turn the equity in their house to cash. Depending on what you intend to do with the money this may be a good idea. As far as loans go it is very unlikely that you would find one with a lower interest rate than a refinance. There are also tax benefits which lower the cost further. However you do want to be careful about what you do with the money since you will be increasing the length of time that you have a mortgage and putting your house at risk.
The other reason that people usually refinance is so that they can get a lower interest rate. They may also do it to change the duration of the mortgage. If they go with a shorter mortgage they will pay more each month but less in total interest, the opposite is true if they go with a longer mortgage. If you can reduce the amount that you pay in interest it is usually a good idea but you do have to make sure that you will actually save money by refinancing.
When you refinance a mortgage there are some pretty significant expenses that you are going to have to pay. You will have to pay the fees involved in getting the new mortgage as well as a prepayment penalty when you pay off the old mortgage. These will likely add up to at least a couple of thousand dollars; make sure that you are prepared for this. You will often see no cost refinancing offered, this does not mean that there are no fees it just means that they are added to the interest that will be charged on the new loan.
