• Costs. If you are paying fees to obtain the loan, it is costing you money to get the loan, which you might not recoup through a lower interest rate for a number of years. To figure this out, add up all the fees. Figure out the difference between your old mortgage payment and your new payment. Divide that difference into the loan fees, which will equal the number of months you must pay on your new loan to break even.
  

  If your loan fees are $4,000, for example, and the monthly savings will be $100 a month, it will take you 40 months to break even on the refinance.

  
  


• Longer amortization period. Although you have the option of shortening your amortization period, you might not qualify for the higher payment nor may you want to pay more each month just to pay off the loan faster. Borrowers generally extend the term of the loan. If you refinance a loan with 25 years remaining for a new 30-year loan, you have turned what was originally a 30-year loan into a 35-year loan.
  

   

  
  


• Bigger mortgage. By rolling the costs of your loan into the loan itself, you are taking out a bigger mortgage. A bigger mortgage eats away at your equity position. Moreover, if you take out cash, called a cash-out refinance, your loan balance will be increased.
  

  Some borrowers take out cash from a refinance to pay off bills incurred by unsecured purchases. If you bought furniture, for example, and you pay off the furniture store, you have now financed furniture for 30 years, which may have a useful life of ten.

  
  

  Paying off unsecured credit cards eliminates present debt but only if you never use the cards again. Consider cutting up your cards if you've managed to get yourself so far into debt that your only recourse is to refinance the roof over your head.

  
  

Refinance Benefits

• Lower monthly paymentIf you plan to stay in the home long enough to break even on the refinance costs, a lower interest rate and payment will result in greater monthly cash flow.
  

   

  
  


• Shortening the amortization period. If your lower interest is substantially lower than your previous rate, you might want to consider shortening the term of your loan in exchange for a slightly higher mortgage payment. Before you do this, figure out if you could invest that extra principal portion elsewhere for a better rate of return.
  

   

  
  

   

  
  


• Cash in hand. Many obtain cash to invest at a higher rate of return than the new interest rate.