Application for a home mortgage refinance is a major financial decision, yet many borrowers don't have a compelling reason for obtaining such a loan. Most individuals hope that it will lower the size of their payments, often because there financial burden has become too great for any or all of a number of reasons. The employer may be downsizing and the employee has lost his or her job. There may be catastrophic medical bills. The borrower may simply want to take advantage of lower interest rates or may want to arrange for a lower mortgage payment obligation each month.

Whatever the reasons are, it is important to know and understand why the loan is being incurred and what the total cost of the loan will be.

Debt consolidation

One of the major reasons for seeking a home mortgage refinance is to consolidate debts, particularly credit card debts or others that have high interest rates. Usually a mortgage will have interest rates that are less than credit card interest rates, which can go as high as 24% at times. To take care of debt consolidation, the refinance mortgage may actually pay off the cards and demand surrender of them, or the mortgage can be obtained with a cash out refinance feature so that you can use the cash to pay off other debts.

Cash out

The ability to get some cash in hand at closing is a primary reason for doing a home mortgage refinance for many borrowers. The cash generally can be used for any legal purpose but has usually be spent for such items as debt reduction, renovation or remodeling of the home, educational or medical expenses or even paying for a vacation. Whatever the reason, sensible planning for and usage of the money make good fiscal sense.

Lower payment

When you obtain a home mortgage refinance spread over a longer time period than that remaining on the original mortgage, unless you have opted for obtaining cash out at closing, you will have a lower monthly payment. This feature can be most helpful if your income has dropped significantly, yet you want to remain in the same home. A lower home mortgage required payment allows you to apply extra money to paying off the principal, or you can use the extra funds for other purposes, such as retirement savings, recreation or creating a business or emergency fund.

Better rates

Another common reason for a home mortgage refinance is when there is a significant reduction in interest rates from the time you obtained the original mortgage. You may have obtained your original mortgage when interest rates were higher, or you may have had to pay higher rates due to credit issues that have now been resolved. Obtaining a refinance loan with lower interest rates will be in your best interest when the savings in rates offsets the cost of the loan refinance. This can often take a year or more at the new rates before the savings begin to take effect.