"Refinancing" your home means different things to different people.  Like most loan related issues, people come in ranges from "I'll refinance whenever it makes sense" to "I'm going to hold onto this loan until I pay it off, no matter what."

Of course, both extremes have their reasons for acting the way they do.  The BIGGEST warning I can give to anyone who has been bombarded with ads offering to lower your rates, or (worse yet) give you a $150,000 loan at 7.5% and only charge $745/month.  What's wrong with that you ask?  Quick calculations (that unfortunately most people do not do) will show that the interest due on $150,000 at 7.5% would be $937.50 per month.  This means, every month that you pay just $745, your mortgage balance is actually increasing by $192.50 per month!  If you continue this for 5 years, then your balance due will then be $161,550.  This means for 5 years you've been paying $745.00 but you'll have to increase your payment (are you ready for this?) up to $1129.58 just to pay it off in 30 MORE years!  If it takes you 10 years to realize you haven't been paying enough for your house, you will then have to pay $1210.34 for 30 MORE years! 

Care to find out just how much interest you end up paying over those 40 years?  Well, for the first 10 years, your interest only payments add up to $89,400.  For the last 30 years, your interest payments would amount to $262,622.40.  (This is the interest only part, mind you.  The total loan payoff would $435,722.40)  So the total interest paid on your $150,000 house over 40 years...?  That would be $352,022.40.  Had you just paid what you would have originally on a 30 year mortgage at 7.5% your total interest would be $227,575.20.  A difference of $124,447.20.  So really, the fact that you want to pay only $745 would end up costing you an additional 10 years and almost $125,000.  That's quite the price to pay for a house originally worth only $150,000!* 

So, before you even inquire about the loans, ask yourself these questions:

1.  Does this loan really make sense?

2.  Just how much money will you save?

3.  Just how much is this loan going to cost (in time, energy, dollars, etc)?

1.  Does this loan really makes sense?

The question sounds pretty vague, but it is quite possibly the most important.  Does refinancing your loan at this point make sense?  Do you have only a year or two left on your mortgage before it is paid off?  Did you just purchase the home a year (or less) ago?  How does the rate on your loan compare to the going rates for new loans/refinances?  Are there pre-payment penalties?  These are just some of the questions you need to ask yourself to determine if it really makes sense to refinance.

So how old is the loan?  If your loan is fairly new (a year old or less) or really old (meaning you have less than a few years left on the loan) then it may not make sense to refinance the loan if you have to pay closing costs all over again.  Why spend several thousand dollars (if the loan is fairly new still) or even a few hundred dollars (if the loan is old) in refinancing it if your return from the refinance may take years to recoup?  Or, worse yet, what if your loan is so old that you spend more in fees refinancing it to lower the rate than had you just paid your loan off as scheduled? 

Furthermore, you must compare your current rate with the going rates on refinances.  How much of a difference are we talking?  This, again, depends on how much longer you will be paying on your loan: the sooner you'll be paying off the loan, the larger the rate difference has to be to make up the cost of refinancing.

I suggest plugging some numbers into a mortgage calculator to see how your current rate/payment would compare to a refinanced rate/payment.  One of my favorites (for its strength, yet simplicity) is:

http://ray.met.fsu.edu/~bret/amortize.html

You can also simply type in "amortization calculator" in a search engine such as www.google.com and see a list of other calculators as well.

2.  Just how much money will you save?

It seems almost too obvious, but you also must ask yourself just how much money will you save?  Depending on where you go to get your loan, and how much you trust your loan officer, it can be quite easy to get sucked into a loan refinance that, yes, might actually not save you money or might even cost you more money.  As a loan officer I would not allow my customer to get a loan if it meant not saving money.  Luckily I never had a bull-headed customer who insisted on refinancing if it meant wasting money.  Had I come across one, I still would have refused the loan (unless, of course, they needed to refinance in order to get cash back and pay off other loans or get themselves out of some sort of money trouble). 

But what is the definition of "saving money" in this case?  If, for instance, you have 10 years left on a 30 year mortgage with a rate of 7%, would it make sense to refinance the loan for 15 years at 6%?  Most people would compare monthly payments ($665.32 on the current loan, $483.54 on the proposed loan) and say, yeah, that will save them $180/month. 

However, you must look at the long term results:  you will end up paying almost $7,000 more in interest if you refinance.  This is because even though you pay $180 less per month, you will be paying the loan for an additional 60 months (5 years) due to the refinance.  So in the long run, you will pay more even though you pay less each month. 

These are the same tricks, by the way, that car dealers use when selling vehicles.  They don't like to think of how much the car costs (or, God forbid, how much the car will actually cost after all the interest is calculated) but rather how little it costs per month.  It's not a $20,000 car, it's "only $300 per month!"  They just don't bother to mention at the time that it will be for 7 years, and you'll end up paying over $25,000 for the $20,000 car.

One good trick I always suggested to my customers, though, is to refinance the 7% rate to 6% but to keep making the same payment ($665/month).  If they don't refinance, they'll end up paying $665/month for 120 months (10 years).  If they refinance and pay the same amount with a lower rate, they'll end up paying off the loan 7 months sooner (9.42 years).  That is, assuming they can refinance for free; which is possible, you just have to shop around.  Even if they have to pay for a refinance (which, with that rate in these times they'd most likely have to) they end up saving nearly $5,000 in interest just by paying off the house 7 months sooner with the lower rate.  So as long as the fees are under $5,000 (which they should be around $1,000 for a loan of that size) it makes sense to refinance and pay the same amount.  And, if their financial situation does get worse (job loss, for instance) the minimum due is still only $483.54 per month.

3.  Just how much is this loan going to cost?

When it comes to refinancing, there are two general ways in which to do so.  Each has its own positives and negatives.

The "full" or "residential" refinance usually gives you the lowest rate, but also the most fees.  The "equity" or "consumer" refinance has a slightly higher rate (generally 1 to 2%) but has fewer fees (and sometimes no fees at all).  As always, it pays to shop around to different mortgage companies (or mortgage brokers) in order to find the best deals.

Here is the difference between each type of refinance:

The "full" or "residential" refinance is (as the name implies) just like when you first purchased the house:  title insurance must be purchased, an appraisal must be made, and then there are the various fees associated with drawing up the loan paperwork, the application itself, origination fees (if applicable) or other closing costs.  Some of these can be avoided (such as origination fees or application fees) but usually it comes with a slightly higher rate as a result (usually .25 - .5% per item avoided).  And then there are some that usually can't be avoided such as title insurance and an appraisal.  That's because the lender wants to verify that nothing has happened to the house since the original loan was created.  You'd be surprised how the value might decrease on the loan (affecting the appraisal) or perhaps a divorce occurred which results in a titling issue. 

The "equity" or "consumer" refinance is a little different.  With these, the banks trade off the risks otherwise associated with a full refinance (i.e. title insurance) and can get away with charging fewer fees.  But, of course, they make up for it with a slightly higher rate.  These refinances are best suited for those who are close, or relatively close, to paying off their mortgage, have a higher rate than average, or are looking to utilize the equity in their house without paying a lot of fees.