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Refinancing: Let's say you currently have a mortgage rate of 8% and you see that the local bank down the street is now offering loans for 6%. In the past you might have just cursed yourself for buying a house several years ago, but now you may choose to get a new loan. The process of getting a new loan to replace your old loan is called refinancing.

Refinancing might make sense if the new interest rate is a lot lower than your current rate. Generally, if there is a 1% difference, it is likely worth going through the process. Depending on the fees, even a half point interest savings might be worth it. You see, when you refinance there a many fees that you will have to pay. It will likely cost several thousand dollars in cash to refinance (even though there are cashless options out there) your current mortgage. If you save one hundred dollars a month in interest, it could take you 3 or 4 years to recoup these fees. You will need to run the numbers to see if it is worth it for you.

Other people refinance to get different loan terms. For example, if you have a 15 year fixed loan and the payment is a little too much to pay comfortably each month, you may choose to refinance with a 30 year term. This would lower your payments substantially, and possibly the interest rate could also be lower. Yes, you are extending the life of the loan, but you may be making your current situation more tolerable. However, be forewarned: Do not wait until you have financial trouble to refinance. The bank that refinances your mortgage needs to make sure you can pay them back. If your credit rating is not good, the interest rate might be very high and/or you will not be able to refinance at all. This is one of the many times that it pays to be prepared.