Everyone seems to be talking about refinancing his or her home. You hear stories on how refinancing can help you take cash out of your equity. You see your neighbors renovating their homes with money they got from refinancing. You ask yourself: Am I being a fool for not refinancing?

In order to make the right decision, you need the facts on refinancing. When you refinance your home, you are in reality taking on another mortgage to replace the first mortgage that you had. The differences are that your second mortgage would have taken into consideration out of the current value of your home and also the current interest rates. On the surface, this may seem like a good deal. You take money out of your asset and you may get lower interest rates on your loan.

However, upon further thought and scrutiny, you realize that the money that you are taking out from your equity is actually an additional amount of loan acquired from the lender based on the increased value of your equity. To put it simply, you are borrowing more money because the value of your collateral has increased.

On the other hand, if your mortgage was on a higher fixed rate loan, you may acquire a lower interest rate once you refinance. However, if your second loan is based on a variable interest rate, you may end up paying more in interest once interest rates rise.

Based on these two facts, should you then choose to refinance? If you had just purchased your home just a few years ago, then refinancing will probably work for you as you can probably acquire a better interest rate now. Nevertheless, you will still need to consider elements such as closing costs or any penalties imposed by your current mortgage lender. If your total cost savings acquired from the refinancing is smaller as compared to the total costs incurred for refinancing, then you may end up spending more that you should.

Also, if you are an older person, refinancing means acquiring a larger loan value and more debt. As you move into retirement, your income may be reduced so you may want to avoid refinancing at that age.

Thus, refinancing may not be the choice for you, as you would want to have more equity than debt. In this case, it may be wiser for you to stick with your current mortgage and pay your loan off before retirement.

Another reason for a person to refinance is to shorten their mortgage repayment period. This happens when the increase in equity value is not withdrawn as cash, but instead is used to pay off the principal of the mortgage. Doing so helps to build equity at a greater rate, putting you out of debt sooner. In this case, refinancing would be the right approach to use.

In conclusion, your decision to refinance should be governed by your own knowledge and your circumstances, than just following the crowd. Therefore, as you analysis make you know that refinancing is right for you.