Refinancing mortgage becomes an attractive option when the existing lender is not willing to grant additional loan on newly accrued equity in the mortgaged property to the property owner. At times, interest rates may be coming down, but the lender my not be willing to pass the benefit to the borrower. Such reasons prompt the borrower to look at other lenders for refinance.

Refinance involves completely clearing the balance outstanding on an existing mortgage by the new lender. Apart from this, the new lender offers either additional loan on mortgage of the same property or reduces the interest rates applicable on the loan, or extends the term of repayment of the mortgage, thereby bringing down the equated monthly installment. The new lender may choose to offer one or more these advantages to the borrower.

Borrowers generally opt for refinance when they need large amount of funds. They use these funds to clear existing short-term debts, which they may be repaying through larger equated monthly installments. Such larger equated monthly installments may actually strain monthly budget, and almost make borrower incapable of managing the debts. Some borrowers take refinance so that they can use part of the equity to purchase a new rental property. Interest component in the monthly installments of mortgage loans is set off against income of the year at the time of income tax calculations. This effectively brings down the interest rate of the mortgage loan still further. In short, refinance improves the individual`s cash flows.

However, lenders are not too happy to loose a reliable customer. So they impose some fees to prevent premature closing of the account. Similarly, the new lender also has a few one-time charges that the borrower may have to incur. If the borrower is cautious, refinance mortgage closing costs can be brought down quite a bit by watching out for the components in these closing charges. By doing so, borrower can avoid repetitive expenses. One essential step that the borrower opting for refinance must consider is asking the new lender to furnish Good Faith Estimate. This gives an estimation of the closing charges that the borrower might incur. Effectively, lender is offering the refinance amount less these closing charges. Therefore, the real interest rate applicable on the refinance mortgage is slightly higher. The borrower should use the amounts in Good Faith Estimate to reassess whether moving from existing lender to a new lender is really worthwhile. Quite often, because of these costs, which work to almost 3 to 5 percent of the loan amount, refinance mortgage is not such a good idea.