Interest Rate

• One common reason homeowners refinance their mortgages is to obtain a better interest rate. When market interest rates drop, you can refinance to the lower rate and enjoy substantial savings each month. Refinancing to a lower rate is a great option if you are in a predatory mortgage. A predatory mortgage loan bears terms that cause a significant financial strain often because of an excessive interest rate. Also, if you have a variable rate mortgage, where the interest fluctuates with market conditions, refinancing to a fixed, low interest rate can help you stabilize your finances.
  
  

Amortization

• The best time to refinance is at the beginning of your mortgage when the bulk of your mortgage payment is attributed toward loan interest. Toward the end of your mortgage term, the majority of your mortgage payment is applied to the principal balance of your loan allowing you to build equity. A refinance at the end of your mortgage term means starting over and building your loan equity.
  
  

Points

• When you refinance your home, the process is not free. You are required to cover administrative and loan processing fees through origination points. Discount points can be used to "buy down" or reduce your loan interest rate. Points are generally one percent of your mortgage loan. Avoid refinancing your mortgage when origination or discount points are too high. Set a minimum savings amount for your refinance. If your points cause you to drop below this monthly savings amount, search for better refinance terms. Use a free refinance calculator to determine whether your mortgage points are low enough to allow you to incur reasonable savings on your home loan.
  
  

Prepayment Penalty

• Refinancing replaces your existing mortgage loan with a new loan. To replace your old loan, your lender must pay the balance of your current mortgage in full. Some lenders charge prepayment penalties following the payment of your loan balance. When these fees are too high, your refinance may not be worth the effort. Review your mortgage agreement to determine whether your loan servicer imposes a prepayment penalty on your current loan and whether there is an opportunity to have this fee waived.