There are several rules of thumb to check if refinancing your loan is worth-while to you. unlike the common assumption, not all of them are relevant to Interest rates. In this short “tips page” we shall look at some of these rules.

i. The market has significantly lower interest rates

This is the most common reason to refinance and it is even more popular when you are paying Sub-prime rates.
Home owners may get better rates when the market condition have changed or if their credit score is better.
This situation is normally applicable to fixed rates loans, but the interest-rate difference often result also with a hefty  prepayment penalty.

ii. Changing fixed-rate to ARM (adjustable-rate-mortgage) or vice versa.

An ARM (Adjustable rate mortgage) gives less security regarding the interest rate you will pay throughout the loan, but normally will have an average of lower interest than those of the fixed rate. The reason for this is that ARM’s interest rate is being adjusted to the remaining period time of the next interest change, which is usually shorter. The benchmarks are also indices like LIBOR (London Inter Bank Offered Rate) or T-Bills, which show relatively lower levels.
However re-financing your mortgage can go both ways:   You may want to take an ARM if current market rates are high and adjust it to a fixed rate mortgage when the market prices go down. On the other hand, switching to an ARM can take your interest rate down significantly.

iii. Shortening or Extending your loan life, hence changing the monthly payment

Shortening your loan life will result in paying more each month, but paying much less throughout the years. This is common for the “empty nest” couples, that can take higher monthly payment and “get rid” of the mortgage quickly. Plus, if market rates went down, while refinancing to a shorter period of time we can leave the monthly payments as they were, but end the mortgage’s life sooner.
Lengthening your mortgage often helps reduce the monthly payment, and is a viable option to young couples that have newly-born children, and need a “breather” on the monthly payments.
Reducing the mortgage period will help build your own equity sooner while extending it is solemnly a good way to lower monthly payments.

iv. Consolidating Loans

consolidating 2 loans will help you pay less or “pay smarter” every-month. This is a good choice for people that took 2 different mortgage on the same house and can ease up their monthly costs by consolidating them.

V. Taking extra obligations: Cash-out/Cash-back mortgages

In this case we can take more money than what we need to cover our mortgage. This is an actual way to turn your home equity into fast cash – and pay later. It is normally considered not to be a wise choice economically, but can be a good solution when you seek home-improvement, or even other purchases.

A word of advise
make sure you refinance for the right reasons, Cashing Out for example should only be considered as home-improvement that will result in raising your property’s value. Extending loans or switching between rate systems should be considered Thoroughly after simulating their long-yearly effects.