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.