Purpose

• Refinancing is when a person takes out a mortgage on a house in order to pay off the original loan. The purpose of this is usually to get a lower interest rate with the refinancing than with the original loan. Other times, refinancing takes place when a homeowner wants to take out the equity in his house in order to pay off bills or to invest the money.
  
  

Paying Fees

• There are some homeowners who find that the only way they can qualify for a refinancing is to pay different fees and surcharges in order to get the loan approved. In those cases, over the long haul, it might add thousands of dollars to the life of the loan.
  
  

Equity

• If a homeowner has a lot of equity in the house, refinancing makes sense. For example, if a homeowner has $20,000 equity in their home and is paying an interest rate of 7%, refinancing to a lower rate and also paying down the mortgage on the house might be a wise move. Another good way to determine whether or not refinancing makes sense is to examine credit scores. The better the credit score, the more likely it is that the refinancing will offer attractive interest rates, assuming the property has not been refinanced within the past two or three years.
  
  

Credit Scores

• Bad credit scores mean that the rate a person refinancing gets is not going to be worth the hassle. The worse the credit score, the higher the interest rate is going to be. Also, refinancing in order to pay off credit card bills is not a good way to go, especially if the homeowner has not learned how to manage his budget. If the spending habits don't change, the homeowner is going to find himself right back in debt and with less home equity than before refinancing.
  
  

Interest Rates

• When interest rates are low, it pays to refinance. This is especially true when it comes to adjustable rate mortgages as opposed to fixed-rate. With an ARM loan, the monthly loan payment might well rise if the market conditions change and send interest rates higher. On the other hand, locking in a fixed-rate means that no matter what happens with interest rates, the rate on the loan will not increase.