Adjustments

• Homeowners often refinance out of an adjustable-rate mortgage (ARM) to avoid the rate jumping upward too much. In other cases, the Federal Reserve reports, owners refinance from a fixed-rate to an ARM or from one ARM to another to take advantage of the ARM's low initial rate. If the rates rise before you move to another house, this could turn out to be extremely expensive. So learn the details regarding the ARM's index rate, where that rate has risen to in the past, how often the ARM rate will adjust; and the cap on the rate.
  
  

Cashing Out

• When you make a "cash-out" refinance, you take out a loan bigger than your original mortgage. For example, if you have an $80,000 mortgage on your $160,000 home, you refinance to $120,000, giving you $40,000 in cash. The interest rate will be lower than running up $40,000 on credit cards, but this is still debt on which you will pay interest. If you're already in financial trouble or having problems controlling spending, a cash-out refinance might make things worse. Unlike credit cards, if you default, you lose your house.
  
  

Costs

• Another risk is the refinancing costs will outweigh the gains. If your mortgage contract has a prepayment penalty, your lender may charge you several thousand dollars if you pay off the original mortgage in the first three to five years. This is particularly common with ARMs. You'll also have to pay several thousand dollars in closing costs, advises the Federal Reserve. If you move before the break-even point -- the time at which lower monthly payments on a refinanced mortgage pay off the refinancing costs -- you'll lose money on the deal.
  
  

Considerations

• Your state's laws may add to the risks of refinancing. In California, for instance, if you default on a refinanced mortgage, your lender cannot only foreclose on your house, but can try to take your other assets to settle your debt. Another risk is that refinancing will add years to the time you'll be paying your mortgage. If you're only a few years from paying it off and eliminating the risk of foreclosure, you might reconsider whether the money you'll save is worth the added debt period.