Whether you refinance with or without taking out some of the equity in your home, you want to make sure the refinancing meets the conditions in the following sections.

You Must Have Good Credit

Your credit rating is a reflection of how responsibly you've used credit and paid your bills over the years. If you're interested in refinancing your home but have poor — or even moderate — credit, you may want to wait a year or two while improving your credit rating. A poor credit rating is usually the result of the following, and it can be improved in the following ways:

• High debt-to-income ratio. Your new house payment should take up no more than 28 percent of your monthly income; your total financial obligations (mortgage payment, insurance, car and credit card payments, utilities) should total no more than 36 percent of your monthly income.

  To improve your debt-to-income ratio, you'll need to pay off and/or reduce some of your financial obligations or increase your income.

• Late payments. If you have a history of paying any of your bills — especially your mortgage payments — after they're due, you're likely to be denied a new mortgage.

  To deal with this problem, spend at least a year paying every single one of your bills early or on time, and then apply for a refinanced mortgage. In your application, include a letter stating your new commitment to cleaning up your poor payment history and explaining your diligence over the previous year.

• Too much credit. If you apply for every charge card or store credit card offer you receive, you may struggle in your refinancing plans. Having too much credit, even if you don't use it, worries lenders because if you should choose to max those charge cards, you might have trouble making your mortgage payments.

  To compensate for this potential setback, immediately cancel all but two of your credit cards and store-charge cards and don't apply for any new credit.

Under the Fair Credit Reporting Act, you're allowed to receive one free credit report every twelve months.

You can also contact each of the three major credit bureaus individually: Experian; Equifax; and Trans Union. For between $10 and $20, these companies send you a copy of your credit report and credit score so that you can set about improving it, if necessary. (If you are ever denied credit, you can get a free copy of your credit report within 60 days of the application.)

Remember that credit reports can be wrong. To be sure, request a copy of your credit report every year or so and correct (in writing) any mistakes that you see.

Interest Rates and Closing Costs Should Be Low

Before considering any refinancing, make sure the interest rate is low enough to make the charges (which are usually lumped into what's called closing costs) associated with refinancing worthwhile. WORKSHEET 10-1 helps you determine how much money refinancing will save you (or cost you!) — you'll need to use a loan calculator like the one at SmartMoney.com.

WORKSHEET 10-1

Financing and Closing Costs

Escrow is an account that mortgage companies usually create for you when you have a low-down-payment mortgage: one-twelfth of your annual homeowner's insurance and property taxes is added to your mortgage payment. The mortgage company then pays your insurance and taxes from the escrow account when those payments are due. Putting your tax and insurance money into an escrow account may seem convenient, but it costs you a bundle of money in the interest that you could be earning on that money throughout the year.

If you're currently paying escrow and have paid down 20 to 25 percent of your purchase price, ask your mortgage company to terminate your escrow account and send you a check for the balance. You can then deposit your insurance and tax payments into a savings account, out of which you pay those annual or semiannual costs yourself.