Refinancing your mortgage

"Refinancing" a mortgage is the act of acquiring a new primary mortgage on your property, the proceeds of which are used to pay off the first mortgage in it's entirety.

There are a couple of different ways refinances can work:

1.  A "Straight" refinance just writes a new first mortgage against the property in the amount of the current outstanding mortgage on the property (plus any closing costs, minus any down payment being made).  This is commonly done in order to take advantage of a lower currently available interest rate on the loan, or to escape PMI payments (if the property now has a high enough equity to avoid PMI), or to shorten a loan term (or, rarely, to extend it).

The old mortgage gets paid off and that lien removed from the home.  The new mortgage takes effect, a new lien is put on the property and a new payment term begins.

2.  A "Cash Out" refinance not only does what is done in case 1 above, but also allows the homeowner to receive an additional amount of money over and above what is necessary to retire the first mortgage.  This money can be used for home improvements, debt consolidation, or any other purpose the homeowner wishes.  In this case, equity in the home is reduced by the additonal amount taken.  The benefits of changed loan term and lower interest rate generally still apply as well.  Cash Out refinances do not (generally) allow more than 90% of the home's appraised value to be financed, so available equity is only what the difference between the current mortgage and that amount may be (some homeowners with exceptional credit files may get 95% or even in some VERY rare cases 100%).

Additionally, It means that you are going to replace your existing mortgage with an entirely new one. The best reasons to do this are you can get a lower interest rate, you can reduce the term of your mortgage from its original 30 years to a 15 or 20 year mortgage and own your home mortgage free years earlier. It is NEVER a good idea to refinance your current mortgage simply to take the equity in your home and get that cash in hand, i.e. you may have purchased your home with a 30 year mortgage for $250,000 a ten years ago and now it's worth $350,000 and you owe $225,000 of the original mortgage. By refinancing for a (cash-out) you would essentially take out a new mortgage for $350,000, with a 100% mortgage loan or about $338,000 with a new FHA mortgage. You pay off the existing $225,000 mortgage and you get either $125,000 or $112,500 cash in your pocket. Which most, but not all, people will promptly spend foolishly on things they want but don't need, and within 12 to 18 months it will all be gone. They will still have a brand new 30 years mortgage, at the same or higher monthly payment depending on the interest rate, when if they would have just done nothing they would have less than 20 years remaining on the mortgage.  If you refinance your mortgage it should be only to decrease your monthly payment, or, to reduce the length of the mortgage. The equity in your home is not a piggy bank.