Even though most mortgage loans are originated for a term of 25 to 30 years, few borrowers keep the loan for more than 5 to 10 years. In many cases, mortgages are paid off when the home is sold. However, many home owners refinance their loans, and for many reasons. A key advantage of being a mortgage borrower is the ability to change financing as conditions change.

Refinance when you need to raise money for some purpose. Over time, you accumulate equity in your home. Equity is the difference between the value of the home and how much you owe on the mortgage. Essentially, your home equity is a form of personal wealth, just like stocks and bonds. Equity increases as the value of your home rises. It also increases as you gradually pay off the principal of the mortgage loan.

Often, until you sell the home, this equity is locked in. Fortunately, you can access equity by refinancing the old loan for one with a higher principal or by getting an additional mortgage on the home. You may find that a loan secured by your home equity is less expensive than other types of consumer loans. Both the interest rate and repayment term are more favorable than other types of borrowing. There are also tax advantages to using a home loan as compared to other types of borrowing.

A great reason to refinance a loan is to take advantage of lower interest rates. For example, suppose you have a fixed-rate loan that you obtained when interest rates were high. You may find that you can get a new loan at a lower rate of interest. A home owner can significantly reduce monthly payments using this tactic.

You may have had a loan provided by the seller when you bought your home. Most of these loans have terms that “balloon,” or expire in a few years. By refinancing, you can assure yourself of long-term financing for your home.

In other cases, home owners with adjustable-rate mortgages (ARMs) may want to refinance with fixed-rate loans while interest rates are relatively low. In this way, the borrower can lock in the interest rate and avoid the risk of rates rising in the future.

If you have major improvements made to your home, you may want to refinance to pay for the work. The improvements should increase the value of the home and allow you to get a larger loan. Even though you can finance improvements in other ways, a new loan covering the entire home might be the least expensive alternative.

Finally, refinancing may be helpful before you sell your home. When rates are low, you may obtain a loan that can be assumed by the buyer. If rates increase before you sell, or if mortgage loans become hard to get, an assumable loan can add to the resale value of your home.

There are certain costs associated with refinancing. Your existing loan may have prepayment penalties that must be paid if the loan is paid back early. The new loan will require application fees, various charges, and dis­count points. These costs must be considered in the decision to refinance. Any savings from the refinancing must outweigh the costs. These savings will be realized over the period you have the loan; so you must stay in the house long enough to make refinancing worthwhile.

The interest you pay on a mortgage loan can, in most cases, be deducted from your income for tax purposes. This deduction provided by the tax law is a key to reducing the cost of owning a home.

To use the deduction, the home must be your principal residence or a second home you use at least part of the year (rental properties have their own special rules). If the loan is the original one you used to buy the home, or was used to improve or construct it, you can deduct all interest paid on up to $ 1 million of the loan balance. If you have refinanced the loan or added a second mortgage since purchase, you can deduct interest paid on any loan balance up to $100,000 (over the balance on the original loan).

For example, suppose you buy a home with a loan of $280,000. Five years later, you refinance the mortgage with a new loan of $400,000.

The balance on the old loan was $275,000. You can deduct interest on $275,000 of the new loan, plus another $100,000 of the new loan, for a total of $375,000. The amount of interest you paid on the remaining $25,000 of loan is considered personal interest, which is not deductible. However, if $25,000 or more had been spent to improve the home, such as to add a room, then all of the interest would be deductible as housing interest.

Another example shows how much you can save from the tax deduction. If you get a mortgage loan for $50,000 at 10% interest for 30 years, your monthly payment is $438.79. Over the first year, you will pay $5265.43, of which $4987.43 is interest. By deducting this interest on your tax return, you will save $1396.48 in taxes (at a tax rate of 28%). This means that the real cost of your mortgage payments is only $322.41 per month.

Keep in mind that if you don’t itemize your deductions, you can take the standard deduction of $7,350 for a married couple in 2001. Therefore, only the amount of itemized deductions above the standard deduction actually represents tax savings. In the example above, if you had no other itemized deductions, you would be better off taking the standard deduction, and the deductibility of interest would be of no practical benefit. Note that itemized deduction amounts begin to phase out (diminish) when income exceeds around $129,000 for married tax­payers filing a joint return in 2001 (half that for singles). The exact income limit is indexed and increases each year. Consequently, for very high-income homeowners, there is no tax benefit derived from financing a home.

In some cases, you can deduct discount points paid to get a mortgage loan to buy a house, but not for refinancing. The points must be customarily charged in your area. If you write a separate check for these points, rather than let the lender deduct the amount from the loan, these points are tax deductible in the year they are paid. However, if the loan was used to refinance an existing loan rather than a new purchase, you cannot deduct discount points in one year. You must spread the cost of the points over the life of the loan

Innovations emerged in the last decade of the twentieth century that are transforming the way home mortgages are made and are promising to bring even more changes in the years ahead. These changes have benefited mortgage borrowers and homebuyers to a great extent, although there are some important tradeoffs. Most importantly, the borrower is in a position today to shop more effectively and make critical decisions based on better information. However, that borrower needs to be aware of the financing choices and sources of information available in order to get the best value.

The big trends affecting the market include:

• The use of computers and electronic communications to speed loan applications.
• The development of a national market for mortgage loans and the growth of major institutions to further that development.
• The demise of inflation has reduced volatility in interest rates and encouraged lenders to extend financing to borrowers once considered too risky.

All Loan Types Available: Purchase, Refinance, Home Equity, Home Improvement, Debt Consolidation (real estate required), 125%, Cash-out, FHA/VA, and Construction.