Uses

• Refinancing lets you change your mortgage for a new one with more favorable terms that save you money. According to the Federal Reserve Board, refinancing is a useful financial tool to reduce the interest rate on your current mortgage. The interest rate attached to your mortgage partly determines the size of your mortgage payment. Refinancing also lets you shorten the length, or term, of your mortgage. Switching to a 15-year mortgage from a 30-year mortgage generates substantial savings in interest payments.
  
  

Applying

• Refinancing involves an application process similar to the mortgage process. You submit an application to a lender for consideration. The lender researches your credit history and evaluates the details in your application to determine whether you are approved for a loan. Once approved, lenders evaluate the condition and value of your home to establish the loan.
  
  

Expenses

• The Federal Reserve estimates that refinancing costs between 3 and 6 percent of the outstanding balance on your mortgage. Areas in the U.S. with higher tax rates are on the higher end of the cost range. If your outstanding balance is $125,000, the approximate cost to refinance your mortgage is between $3,750 and $7,500. Refinancing costs are paid upfront or added to the loan.
  
  

Benefit

• Refinancing is a way to benefit from better mortgage terms and lower borrowing costs, but not in certain situations. For example, if you plan to sell your home after refinancing, you lose the chance to benefit from the lower monthly payments and you never recover your refinancing costs. Plan to stay in your home long enough to earn back the refinancing costs. Also, consider how long you have had your mortgage. During later years, more of your mortgage payment goes toward decreasing the principal and building equity. Refinancing at this point denies you the chance to pay off your mortgage on schedule and restarts the payment cycle where most of your payment goes toward paying interest.
  
  

Advertisements

• Advertisements for refinancing deals are promotional materials and not necessarily an offer of specific terms. Refinancing advertisements originate from mailings, real estate professionals, mortgage brokers and banks to generate customers. Marketing materials emphasize low interest rates or introductory rates for a certain loan. Speak with the lender and obtain actual rates and fees to help you make an informed decision.