Interest Rates

• Refinancing to obtain a lower interest rate on your mortgage helps you save money for the term of your loan. The interest rate is one of the factors that affects the amount of your monthly mortgage payment. The Federal Reserve illustrates this point by estimating the savings you can generate from a slight change in mortgage rates. Suppose your current mortgage for $200,000 is financed at 6 percent for 30 years. Refinancing to lower your interest rate by just one point to 5 percent saves you $1,500 annually.
  
  

Term

• Similarly, you can refinance to shorten the term of your mortgage. The term of your mortgage is the length of time for your repayment schedule. By shortening the term of your mortgage, you decrease the amount of time you pay interest to your lender. For example, if your original mortgage of $200,000 was financed at 6 percent over 30 years, your total cost is $431,640. Refinancing for 15 years lowers your long-term cost to $294,120.
  
  

Application

• The refinancing process is similar to the mortgage process, according to the Federal Reserve Board. Most lenders require you to submit an application to request a refinancing loan. Part of the application process includes verifying your credit history, employment status, income, debts and assets to determine how much you can afford to borrow.
  
  

Refinancing Costs

• Like the mortgage process, refinancing requires you pay the costs associated with your refinancing application. According to the Federal Reserve, refinancing costs between 3 and 6 percent of the remaining balance on your mortgage. For example, you may need to pay between $4,500 and $9,000 if you are refinancing $150,000. You are more likely to pay higher closing costs if you live in a high cost area of the country. Refinancing costs are made up of all the fees involved in the closing process.
  
  

Compare Lenders

• To keep your application fees and other costs low, compare refinancing offers from various lenders. Although you may be comfortable with your current lender, another lender may offer you a better interest rate or lower costs. The Federal Reserve Board recommends comparing the details of each offer and to secure in writing any offer for a particular interest rate or low fee. This important because lending conditions change often and you may not be able to refinance with the terms you want without a written commitment.