Term

• When you refinance your mortgage, you can agree to a longer term or a shorter term. A longer term gives you the opportunity to have a lower monthly payment, but you will pay more finance charges over the life of the loan than you would with a shorter term. A shorter term allows you to pay the loan faster but requires a larger monthly payment. Make sure you can afford the higher payment before you sign the loan papers.
  
  

Interest Rate

• Most homeowners refinance to receive a lower rate of interest. As a rule of thumb, if you can receive a rate that is two points lower than your current rate, you probably should refinance, because a lower rate will save you thousands of dollars over the term of your loan.
  
  If you have an adjustable rate mortgage (ARM), your payments can increase when the index your interest rate is tied to increases. This can make it difficult to budget when there are periodic increases in your monthly payment. You can change to a fixed rate when you refinance, allowing you to maintain the same monthly payment over the term of the loan.
  
  

Cash-Out Refinance

• You can tap into the equity in your home to consolidate debt, such as credit card balances, or to pay high-cost items such as medical bills or college tuition. The interest rate on your mortgage is usually less than the rate on your credit cards or on personal loans, which will save you money in finance charges. But this will increase the amount of your loan.
  
  

Costs

• Costs associated with refinancing can include lender's fees, appraisal fees and credit report costs. Most lenders will allow you to roll these costs in with the amount of the loan so you don't have to pay these expenses up front. The costs you incur can be as much as $3,000, depending on the terms and conditions of your loan.
  
  

Considerations

• If you are planning to move in a year or two, refinancing might not be your best plan of action, depending on how much it costs you to refinance. The difference between the payments divided into the costs will give you the number of months you need to remain in your home if you want to recover your costs. For example, if your old mortgage payment is $900, the new payment is $800 and it cost you $3,000 to refinance, it would take 2 1/2 years to recoup the costs ($3,000 / $100 = 30 months).