Should You Refinance?
Your decision depends on many variables. How long have you owned the home? Do the savings justify the cost and hassle? Will you incur a penalty if you pay off your current loan early?
Refinancing makes sense if:
•  Rates have lowered significantly since obtaining your original loan
•   You want to use the equity that's built up in your home since you bought it
•   You want to shorten your mortgage payment period
•  You want a fixed-rate mortgage instead of an adjustable rate, or vice versa

When to Refinance
Rule of thumb used to be that you refinance only when the current rate is two percentage points lower than what you're paying. But with the advent of "no cost" refinancing options, that precept is no longer valid. However, the term "no cost" is something of a misnomer. It doesn't mean free; it means you won't pay anything out of your own pocket at closing. Either the fees charged by the lender will be rolled into your new loan balance or the rate will be higher than if you paid the lender's charges up-front.
The real determinant is how long it will take to recoup your costs. Evaluate monthly savings against up-front costs. If you can save $100 a month on your mortgage payment by refinancing, but you have to pay $2,500 for the privilege, then you have to keep the new loan for at least 25 months to break even. If you're planning to move sooner, it doesn't pay to refinance. But if you're going to stay in the house longer, refinancing is usually a sound financial decision.

When Not to Refinance
Refinancing doesn't make sense if:
• Rates aren't significantly lower since you obtained your original loan
• You've had your current mortgage for a long period of time
• You've paid off most or all of the interest on your current mortgage
• Your existing mortgage contains a prepayment penalty clause

The big question is how long you've held your current mortgage. The longer you’ve had your present loan, the less advantageous it is to refinance, especially if the difference between your old and new interest rate isn't significant.

For example, if you are in the tenth year of 30-year mortgage, then refinancing into a new, 30-year loan pushes back the scheduled date that you would be retiring your mortgage. By starting over with a new, 30-year horizon, you’ll lower your monthly payment but the total you’ll pay in interest over the life of the loan will most likely go up.

Remember, house payments in the early years are almost all interest. While interest is tax deductible, it is still cash out of your pocket. Every dollar you pay in interest is tax deductible, but your savings per dollar is equivalent only to your tax bracket. So if you're in the 31 percent bracket, your net write-off is just 31 cents, not a full $1.

The only sound way around this is to switch to a loan with a shorter term, say 15 years rather than 30. Your monthly savings won't be as significant but you'll be shave years off your loan, so that your total interest costs if you keep the loan until the mortgage is retired won't be as great.

Some mortgages have a prepayment penalty clause. To protect themselves against losing loans before they become profitable, many lenders charge borrowers a penalty if they pay off their loans before a certain period. Usually, that's no more than two years, but sometimes it's five. The fee could be as much as a percentage of the unpaid balance or a full month's interest. In exchange for accepting the prepayment penalty when the loan is made, the borrower usually gets a slight break on his interest rate.

Prepayment penalties are illegal in mortgages insured or guaranteed by the federal government and some other loans. Your loan documents will tell you whether your mortgage contains such a clause as well as the length of the penalty period and the fee.

Prepare to refinance
Refinancing means you're starting the loan process again. You’ll go through essentially the same process as when you took out your current mortgage. First, you'll gather your records; make sure your credit profile is in order. If you have a good payment history with your current loan, lenders will see you're a good risk.

Paperwork
Nothing's changed: Your lender will verify your income, employment, account balances and the like. You'll need to produce current pay stubs, savings and checking account statements. If you're self-employed, you'll need copies of your last two federal income tax returns as well as a profit-and-loss statement and personal financial statement. Bring your checkbook to pay for a new appraisal and credit report.

Credit Matters
Order copies of your credit reports from the three credit agencies to make sure they're accurate and current. Correct any errors and bring the information up-to-date.
Make yourself more creditworthy: scrap unneeded credit cards, pay balances down to at least half the credit limit and pay all bills on time.