There are many reasons why homeowners refinance: to obtain a lower interest rate; to shorten the term of their mortgage; to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; to tap into home equity to finance a large purchase, or to consolidate debt.

Since refinancing can cost between 3% and 6% of a loan's principal and - as with an original mortgage - requires an appraisal, title search, and application fees, it's important for a homeowner to determine whether refinancing is a wise financial decision.

A lower interest rate on your mortgage is one of the best reasons to refinance. When interest rates drop, also consider refinancing to shorten the term of your mortgage and pay significantly less in interest payments. Switching to a fixed-rate mortgage - or to an adjustable-rate one - can make sense depending on the rates and how long you plan to remain in your current home. Finally, tapping equity or consolidating debt can be good reasons to refinance but doing so can sometimes make the debt trap worse.

A more in-depth discussion can be found in this article.