Function

• When a homeowner with a mortgage wishes to make a change in his mortgage loan, he has no right to do so under the current mortgage. In order to do so, a borrower must get a new mortgage. However, a mortgage must have clear rights to the house as collateral. If there is already a mortgage, then a new mortgage cannot be entered into. With refinancing, the new lender pays off the old mortgage with the new mortgage, thus allowing the borrower to have the new terms.
  
  

Warning

• A great part of the concern over the recent housing bubble centers on people who did what is known as a "cash out" refinance. With this kind of refinance, the homeowner borrows more money than is necessary to pay off the old mortgage and receives the extra money as cash. This lowers the owner's equity in the house.
  Be careful not to assume that you will be able to refinance your mortgage in the future. Many homeowners assumed they would be able to refinance their adjustable rate mortgages before the rate started adjusting. However, there is no guarantee that a homeowner will be able to refinance, particularly if the value of the home has fallen.
  
  

Size

• Most mortgage refinances follow the same rules as a standard purchase mortgage. Thus, a refinance must leave the homeowner with a mortgage equal to or less than 80 percent of the home's value to avoid paying mortgage insurance. In addition, many lenders have rules that require the mortgage payment to account for only a certain percentage of a person's monthly salary. Generally, one cannot refinance for more than the home's total value, although some lenders have programs that allow for such a thing, usually with a higher interest rate.
  
  

Considerations

• When refinancing, there are several things to consider. First, what is the purpose of the refinancing? If there is a specific goal in mind, then it is prudent to structure the refinancing so that the amount refinanced is no more than the amount needed to accomplish the goal. Second, any refinancing that increases the loan balance will lower the homeowner's equity in the house. Third, what terms should the new mortgage have? A shorter term may make sense particularly if the original mortgage has less than 15 years left.
  
  

Benefits

• Refinancing allows the homeowner to get different terms for her mortgage. This can be beneficial in many ways, most notably when the borrower's circumstances have changed. For example, a homeowner who has a couple of children may need to have lower payments or may need to remodel the basement. Sometimes, this can be achieved by refinancing. Another common reason for refinancing is to get a lower interest rate. If a borrower took a mortgage at 8 percent, she may be able to get a lower rate if rates have fallen.
  
  

Misconceptions

• The person or company handling the refinancing is not necessarily the company that will service the mortgage. Many mortgage brokers or firms use investor dollars to fund mortgages that are then sold to another financial company that actually collects the payments on the mortgage for the life of the loan.