Refinancing a mortgage means converting your current mortgage into a new loan, usually to save money, convert to a new type of mortgage, or tap into equity in the property. When you are thinking of refinancing there are several questions to ask yourself before you go ahead and start the refinancing process. Once you have decided to refinance, you will then have to go through the mortgage process all over again, from application to closing.

Step One: Should you refinance or is there a better option?

The first step in the refinancing process is to decide whether to refinance at all. Depending on your purpose for refinancing, there may very well be a better financial option.

To decide whether you should refinance, ask yourself what you plan to accomplish through refinancing, and whether there is a better way to achieve that goal. If you want to switch to a new mortgage type or obtain a better interest rate on your mortgage, for example, the only way to achieve these goals is, of course, to refinance.

On the other hand, if you need cash to remodel your kitchen or bathroom, or achieve another goal for which cash is needed (such as debt consolidation), it's important to think about whether refinancing is the best way to go about it. In some cases, for example, a home equity loan or home equity line of credit is a better option than refinancing.

In this last case, there are situations where an HEL or HELOC is a better option than refinancing, and situations where the reverse is true. If you can refinance to a lower interest rate, for example, this is generally a better option. If interest rates are high, however, an HEL or HELOC is usually preferred.

Step Two: Decide whether it's a good time to refinance

Is it a good time for you to refinance? This depends mostly on the current economic situation, as well as some more personal considerations. When it comes to finances, look at the interest rate on your current mortgage, and compare that to current interest rates. Can you get an interest rate that is at least 1-2% lower than your current rate? If the answer is no, it is not likely that refinancing will help you save money on your mortgage. However, your individual circumstances are different, so you may feel it is worthwhile to look further into the matter anyway, even if a preliminary examination indicates that refinancing will be a good option.

Another important, and more personal, consideration is whether you think you will be staying in the home long term. For refinancing to pay off, you must continue living in the home until you have recovered the costs of refinancing (when you refinance you will pay a new set of lender's fees as well as closing costs). In most cases, it takes between three and five years before the costs of refinancing are recouped by the savings made in lower mortgage repayments.

Step Three: Talk to lenders

Once you have decided that refinancing is the right thing to do, and it is the right time to do it, the next step is deciding whether to stay with your existing lender, or to try and find another lender who is willing to offer you a better deal on your new mortgage.

If you decide to stick with your current lender, you may be able to negotiate favorable terms for refinancing, but your lender may also offer you the chance to simply renegotiate your existing mortgage. This will carry with it some fees, but you may be able to avoid paying closing costs, which is a great way of saving on most of the expense of refinancing. Apart from this possibility, there is no real reason to stay with your current lender if you can get a better deal elsewhere, so do not feel obliged to give your business to the lender that has previously held your mortgage.

Step Four: Decide on terms and conditions

One of the reasons many people decide to refinance is for the purpose of switching to another type of mortgage. One popular method is to obtain an adjustable rate mortgage for an initial period to take advantage of a low initial rate, and then refinance to a fixed rate mortgage when this period ends.

Even if you decide to stay with the same type of mortgage you already have, such as a fixed-rate mortgage, you can change the term of the mortgage to your advantage. You may decide, for example, to change the term from thirty years to fifteen, to reflect the fact that you have more equity in your home and can afford to reduce the term without paying higher repayments than you can afford. Alternatively, you may decide to keep the same terms and exchange some of the equity in your home for cash.