To refinance a mortgage is to take out a new home mortgage and use some or all of the proceeds to pay off an existing mortgage on your home. The main purpose of mortgage refinance is to obtain a lower mortgage interest rate or lower your monthly mortgage payments by extending the term of your loan. Remember that if you extend the term of the loan, you will reduce your monthly mortgage payment, but you will end up paying more total interest over the years.

If you do refinance your home mortgage, you want to make sure that your monthly savings from refinancing will pay back the costs that are associated with the refinance while you are still living in your home. If you move before your mortgage refinance has paid for itself, you won't actually end up saving any money. You can determine how long it will take for you to pay off the refinance by dividing the refinance costs (points, closing costs, and private mortgage insurance) by the amount you will save each month when you refinance your mortgage. Alternatively, you can eliminate the problem if you can find a no-point, no-closing-cost mortgage.

Generally, there are two types of mortgage refinance: no cash-out refinancing and cash-out refinancing. No cash-out refinancing occurs when the amount of the new loan does not exceed the currently owed mortgage debt. Typically, you can borrow up to 95 percent of your home's appraised value with this type of refinancing.

Cash-out refinancing occurs when you borrow more than you owe on your current mortgage. You are generally limited to borrowing no more than 75 to 80 percent of your home's appraised value with cash-out refinancing. You can use the excess proceeds in any way you wish. Most people use this type of refinancing to pay off other outstanding loans, since the interest rate they pay on the extra cash they borrow will usually be less than the interest rate on the debt that they pay off (e.g., car loans, credit cards). Also, mortgage interest is typically tax deductible, while the interest on consumer debt is not. This strategy is useful if you use it to reduce your debt payments and you do not start charging items on your credit card again.