When you refinance your mortgage, you're actually replacing it with a brand new loan. In doing this, expect to go through a mortgage application process similar to what you experienced with your original mortgage.

Refinancing is often a sound financial choice that can allow you to meet a variety of needs:

• Reduce your monthly payments by taking advantage of lower interest rates or extending the repayment period
• Reduce your interest rate risk by switching from an adjustable-rate to a fixed-rate loan or from a balloon mortgage to a fixed-rate loan
• Reduce your interest cost over the life of your mortgage by taking advantage of lower rates or shortening the term of your loan
• Pay off your mortgage faster (accelerating the build-up of equity) by shortening the term of your loan
• Free up cash for major expenses or to consolidate debts

Rate-Term Refinance vs. Cash-Out Refinance
A rate-term refinance is a new loan for the same amount of money as is owed on the existing mortgage. The new loan pays off the old one, and you now have a loan with new repayment terms. The purpose of the loan could be to reduce your interest rate, adjust your loan term, or both.

If you decide to finance your closing costs, as most homeowners do, your new loan amount would be the sum of the outstanding principal plus your closing costs.

Since you’ve owned your home, you’ve probably built up equity through your principal payments on your current loan and home price appreciation. A cash-out refinance allows you to access this equity to finance a home improvement, college tuition, another real estate purchase, or just about anything else.

With a cash-out refinance, your new loan amount exceeds your current mortgage balance plus the new loan’s closing costs. That difference is cash that’s given to you at loan closing. Your new loan will have new repayment terms and a higher outstanding loan balance.

The Right Time to Refinance
Many homeowners consider refinancing when interest rates suddenly fall or there's a change in financial circumstances. A good rule of thumb is that if interest rates are 1/2% to 5/8% lower than your current interest rate, it may be a good time to consider a refinance.

But even though a large decline in rates or an opportunity to pay off debt might make refinancing seem like a no-brainer, you shouldn't consider any single variable on its own. Think about how long you plan to stay in your home, how you plan to use your equity, and how a refinance will support your overall financial goals.