Understanding refinancing rates

In theory, refinancing is pretty simple: You're just paying off your existing mortgage and taking out a new one.

You might do this for several reasons.

Maybe mortgage rates have fallen since you got your original mortgage, and you want to lower your monthly payment (and overall costs) by taking out a new mortgage at the new lower rate. Or you want to extend or shorten your mortgage terms. Or perhaps you have an adjustable rate mortgage and you want to get into a fixed rate mortgage.

The most common reason to refinance rates is to give yourself a lower monthly payment.

Say you took out a $250,000 mortgage with a 30-year term at a fixed rate of 8%. Now you can get a similar loan with an interest rate closer to 7%. To refinance, you take out a new loan with a lower rate and use the proceeds to pay off the old mortgage. Your monthly payment drops by about $170 a month, saving you $2,000 annually.

Even if you can’t get a better interest rate than the one you currently have, you might be able to lower your monthly payments by stretching payments over a longer period. If you have a 15-year mortgage, you will probably be able to lower your monthly payments by refinancing into a 30-year loan.

You can also go the other way. Changing from 30-year mortgage to a 15-year will raise your monthly payment, but it should get you a lower interest rate. And because you’re paying the loan back faster, you’ll pay less interest over the life of the mortgage loan.

Refinancing can also help you pull equity out of your home. Although that might be a stretch for many people in this market, those who bought their home a while ago, and have been dutifully paying down the amount owed, can tape this cash for other uses, like medical costs or college tuition.

Still, with any refinancing, you have to figure whether the closing costs to do the refi justify the savings you get from the lower rates. Will you be in your home long enough to realize savings from the refinance?

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