There are several different types of refinancing and each addresses one or more particular goal.

Rate Refinancing

The most common type of refinancing is a rate refinance. This is where someone wants to replace his current mortgage with a new one that has a lower rate.

Mortgage rates move about in swings. First they’re on an upward trend for a while, then they stabilize, then they move back downward, following national economic trends.

Let’s say you first bought your property a couple of years ago and you got a 30-year fixed rate mortgage at 7 percent, and interest rates fell to 6 percent. On a $300,000 mortgage, the difference between 7 percent and 6 percent is $1,995 and $1,798, respectively. By refinancing into a lower rate, you’re saving $197 per month.

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Term Refinancing

A term refinance changes the length of the loan, or its term. A 30-year mortgage has a 30-year term, a 15-year mortgage has a 15-year term, and so on. Mortgage rates can be issued by a mortgage lender in 5-year increments.

A longer term keeps the payments lower than a shorter term. Sometimes, people refinance to a shorter term so they’ll save on long-term interest charges, while others refinance to a longer term to make their payments more affordable.

If you have a 15-year fixed-rate mortgage and would like to reduce the payments a little, you can opt for a 20-year, 25-year, 30-year, or even longer term mortgage. On a $200,000 15-year loan at 6 percent, the monthly payment would be $1,687. Changing the term to a 30-year loan at 6 percent, the payment drops to $1,199. On the other hand, if you want to shorten the term, a term refinance will change your term from a 30-year to a 20-year, or whatever term you choose. A 30-year loan at 6 percent on $200,000 is $1,199, while 6 percent on a 20-year note ends up being $1,432.

Rate-and-Term Refinancing

A rate-and-term refinance is perhaps the most common of the refinances, changing both the rate and/or the term at the same time.

Sometimes, a 30-year loan is 4 or 5 years old, meaning there are 25 or 26 years left to pay. When refinancing to get a lower rate, refinancing into a term similar to the remaining years left can be something to consider, instead of paying even more interest over the long term by staring all over with a brand new 30-year loan. Rate-and-term refinance loans allow rolling closing costs into the loan, and even things such as property tax and insurance can be rolled into the loan and still be classified as a rate-and-term refinance.

Cash-Out Refinancing

A cash-out refinance means pulling equity out of your property in the form of cash to you, in addition to replacing the current mortgage. It’s important to distinguish between a rate-and-term and a cash-out, because cash-out loans are more expensive than a rate-and-term refinance. Cash-out loans also have restrictions on the amount one can borrow, with most limited to 80 percent of the value of the home.

Let’s say you have a house that’s worth $400,000, and you have a $200,000 mortgage on it. Rates have dropped from 7 percent to 6.50 percent, and you’re going to refinance. While you’re at it, you decide you’d like to pull out an additional $20,000 to pay for college or to pay off a car loan. Instead of refinancing $200,000, you’re now refinancing $220,000.

Refinancing Multiple Liens

Sometimes, people buy properties with not just one mortgage but with two – one big one and one smaller one. This is often done to avoid private mortgage insurance, or PMI. PMI is an insurance policy lender’s requirement when less than 20 percent is put down on a home purchase. Back more than 50 years ago, may home loans required a hefty down payment on that amount to 20 or 30 percent. That kept a lot of folks who couldn’t save up that kind of money out of homes.

But a company called Mortgage Guaranty Insurance Corporation, or MGIC, came up with an insurance policy that would cover the difference between 20 percent down and whatever the buyers put down. If the buyers put 5 percent down, MGIC would issue an insurance policy covering the remaining 15 percent, should the borrowers default. The problem with PMI, though, is that most of the policies are not tax deductible, or at least not those made before 2007.

Multiple liens mean higher rates for mortgages and liens placed in a second or third position. Refinancing multiple liens into one lien gives the homeowner a lower rate. These multiple liens may also be liens placed on the property that aren’t loans but judgments awarded third parties who might have sued the homeowner and placed a lien for the awarded amount on the house. The house can never be refinanced or sold without that lien being paid off.