Borrowers are refinancing their homes in droves. While this practice can offer many benefits for homeowners, knowing what to expect can help you decide if it's right for you.

Interest rates are rising. Should you lock in a low rate now, or would refinancing be a huge mistake? Unfortunately, the arguments for and against refinancing don't provide a one-size-fits-all solution. Use the following list to help you decide if refinancing is best for you.

1. Lower interest rates

Many borrowers refinance their homes when interest rates are low. If you're paying 10 percent, paying 6 percent certainly sounds better. But refinancing isn't free. Make sure that your closing costs don't negate the amount of money that you'll save.

If your credit has improved since you purchased your home, your new rate may reflect that. But the opposite is also true. If your credit has suffered, now may not be the best time to refinance. If a lender or mortgage broker reviews your credit, their inquiries can negatively affect your credit score. Only pursue this option if you're in dire straits and need to reduce your payments in order to stay afloat.

2. Greater investment return.

If you're spending all of your hard-earned cash on your house payment, you could be missing out on a prime investment market. Consider refinancing in order to reduce your monthly outlay. Then, invest the extra funds into a diverse investment portfolio. You'll be able to keep your house and invest in your long-term goals simultaneously.

3. Debt reduction.

Use the equity that you've accumulated to do a cash-out refinance. You'll receive a lump sum payment that you can use to reduce or pay off debt. If you have a large amount of high-interest credit card debt, you could save thousands of dollars this way. Unlike a home equity loan that lenders simply add to your existing mortgage, a cash-out refinancing loan will totally replace it. But don't forget that you'll be using one form of debt to substitute for another. You'll also need to avoid the temptation to use that extra cash for frivolous expenses.

4. New repayment period.

Refinancing resets your mortgage clock. A longer term may significantly reduce your monthly payment amount. It will also increase the amount of interest that you'll pay over the life of the loan, so think carefully before pursuing this option.

5. Lower monthly payments.

Most homeowners refinance to lower their monthly payments on a fixed- or adjustable-rate mortgage (ARM) with a high interest rate. Lenders generally issue ARMs with low initial fixed "teaser" rates, but they often dramatically increase once they convert to an adjustable rate, usually after one to five years.

Refinancing your home can be a rewarding endeavor. Lower monthly payments, extended loan terms, debt reduction, and reduced interest rates all provide powerful incentives. But refinancing does not benefit all borrowers, and can be quite costly. Consider all the options to make sure that refinancing is truly right for you.

Published on July 21, 2007