Homeowners it seems are forever on the lookout for ways to cut down on their bills. And home refinancing has become the method of choice for many. But be careful before you jump into any deal. There are times when refinancing can end up costing you more than you save on your monthly bills. Let’s begin by examining when a new loan makes sense.

If your current loan has an adjustable rate, this is probably a good time to look into refinancing to a fixed rate loan. Chances are you’ll save money. Adjustable rate loans can be good if you get the loan when the rates are high. But in the current rate environment it doesn’t make sense. It could mean thousands of dollars in your pocket over the duration of the loan if you can simply lock in a low rate. Interest rates always go back up. When they do, you’ll still be locked in at the current low rate.

Something else to consider is if you have a pending balloon payment. Maybe it snuck up on you and you’re not prepared or simply don’t have the money to pay. Refinancing could be your only option. Also find out if the rate you’re paying now is higher than the current market rate. If it is, you should definitely look into refinancing. All it takes is one-quarter of one percent difference in the rate to make a huge difference on a 30 year mortgage.

Of course that all sound great but naturally there are some things to look out for as well. Carefully examine the closing costs. Refinancing is not free and some of the costs associated with it can be pretty significant. Once you know the costs, do some figuring to determine how long it will take to to recover that money from the savings you see each month.

Why is this important? Well if you plan on moving in the near future, refinancing may end up costing you money. Be sure you are going to stay in your home long enough to make up the difference, otherwise you’re just throwing money away.

Also look at the potential pre-payment penalties on your new loan. Most new loans will have them, and the average cost is 2-5 years. If you will be moving and need to take out a new loan, this will be an expensive problem. It’s also a problem if you want the loan to be paid off early. So be sure to determine those pre-payment penalties and again, measure them against your monthly savings.

Of course the most obvious thing to look at is your monthly payment. Many people choose a cash out option when refinancing. This means money in your pocket now, but it also means a higher balance on your loan. Even if your interest rate goes down, it is conceivable that your monthly payment will actually go up. The best situation is to get a rate significantly lower while using a cash out option. This means money now and lower payments, even with a higher balance.

Home refinancing can be a great way to cut down on your monthly expenses, and also give you some spending money if you need it. But doing it at the wrong time and under the wrong conditions can cost you money that we’re sure you don’t want to give away. Always check your savings against any fees and penalties, as well as other factors such as a potential move. If everything checks out in your favor, don’t just go with the first offer you receive. Shop around. You’ll be surprised at the difference in rates in terms that exist. And get recommendations from friends and relatives as well.

Good decisions can be extremely beneficial to your financial well being.