Refinancing a mortgage means paying off an existing mortgage to create a new one. There are several reasons why borrowers choose to refinance their existing mortgage, including lowering the interest rate on the mortgage, changing the duration of the mortgage and to earn funds from the equity built up on the home. While refinancing a mortgage may appear beneficial, it is not ideal for those who have been paying the current mortgage for a long time or those who are planning to move out from the home soon, according to the Federal Reserve.
Refinancing a mortgage to a lower interest rate is a good idea, especially when market conditions present the option to do so. Paying at a lower interest rate can help borrowers build up the equity on their homes faster. A 0.5 percent difference in interest rates can add up to hundreds or thousands of dollars in savings.
When refinancing a loan, the process also presents the opportunity to either increase or decrease the length of time that a borrower is obligated to pay the mortgage in full. Increasing the mortgage terms will result in lower payments but higher rates, while shorter mortgage terms enable borrowers to pay off the loan in a shorter amount of time but at higher monthly payments, reports the Federal Reserve.
Borrowers can also choose to refinance a mortgage to earn extra cash from the equity that has built up on their homes. It should be noted, however, that once the borrower takes out equity, he will own less of the home and it will take a while to build the equity back up.