Definition

• Refinancing is the process that establishes a new mortgage for your home. By refinancing, you apply for a new loan to finance the balance of your current mortgage under the terms of another loan and possibly another lender. An important part of refinancing is that your current mortgage is paid off with your refinancing loan, and your new monthly payment is based on the terms of the refinancing loan.
  
  

Significance

• Refinancing gives you the option to not only capture the equity that has built up in your home but also to change the terms of your mortgage. Ideally, you want cheaper borrowing terms that decrease the cost of paying off your home over the life of your mortgage. For example, if you qualify for a lower interest rate than the one currently associated with your mortgage, you potentially save tens of thousands in interest payments.
  
  

Features

• The features of a refinanced loan aren't much different than those of any other mortgage. Depending on how you negotiated the terms of your mortgage, a refinanced mortgage is still subject to a specific interest rate based on your credit history, a principal and a repayment schedule. In addition, your refinanced mortgage is still subject to mortgage and homeowner's insurance. However, according to the Federal Reserve, you're exempt from mortgage insurance if you have at least 20 percent in equity.
  
  

Requirements

• The requirements to refinance your mortgage vary by lender. Lenders commonly require you to submit a loan application to evaluate your employment, income, assets, debts and credit history. Once approved, lenders evaluate your home to ensure that the value of your home is worth at least the amount of your refinanced loan. Part of this evaluation includes an appraisal to establish the value of your home and a structural inspection to ensure the home is in good condition.
  
  

Misconceptions

• One of the most common misconceptions about refinancing is that a lower interest rate is sufficient reason to refinance. While a lower interest rate decreases the cost of the loan, your mortgage may not be cheaper in the long run. Before you generate any savings, you have to break even and make back the money you spent on refinancing. In addition, you also end up paying a mortgage for more than 30 years if you refinance to obtain another 30-year mortgage on top of the years you've already paid on your original mortgage.