Purpose

• The purpose of refinancing is to change the terms of a loan. These terms commonly include adjusting the interest rate or the length of the loan. For instance, when you refinance a home, you are actually creating a new mortgage. The refinancing process pays off your old mortgage and replaces it with a new one. In cases where you have a second mortgage, you may have the flexibility to combine the first and second mortgage into a single payment. This allows you to take advantage of new loan terms and payments, often at a lower cost in the short run, and potentially large savings in the long run.
  
  

Interest Rates

• Homeowners commonly refinance their homes when mortgage interest rates drop. This is because your monthly mortgage payment is tied to the interest rate. Depending on the the terms of the refinancing, a drop of a mere ½ percent can make a large difference in your overall loan debt. Long-term savings can add into the tens of thousands of dollars over the course of a mortgage when you reduce your interest rate. However, the positive effects of a lower interest rate can be reduced by refinancing fees and other charges.
  
  

Time

• Refinancing creates a new loan and terms, including establishing a new length of repayment time for the life of the new loan. For example, if you paid on your original mortgage for 20 years, the new mortgage created by refinancing will start a fresh payment history for the length of time you select. As a result, you may be making mortgage payments for more time than indicated by your original mortgage.
  
  

Costs

• Costs involved in refinancing are generally incurred by the borrower. For example, refinancing a mortgage subjects you to all the costs, application and approval processes involved when you originally applied for the loan. These costs commonly include closing costs, survey or appraisals and any document fees required in your state. In addition, you may also be subject to a credit review and will need to prove your financial stability.
  
  

Advantages

• Refinancing a loan may carry a number of advanatages for borrowers. For instance, a reduction in your monthly payment is an immediate benefit of the refinancing. If equity is available, you may find yourself with extra cash in your hands. In addition, if you have combined a first and second mortgage, you will have one less bill to pay each month. Under favorable refinancing terms and a lower interest rate, you will have saved yourself thousands of dollars in financing costs. Generally, refinancing is advantageous if the savings generated by refinancing are greater than the costs of refinancing.