Should I refinance my mortgage?

Refinancing a mortgage can be helpful for homeowners who want to modify their loan terms or tap into their home equity for cash.

With a rate-and-term refinance, borrowers can lower their monthly payments or shorten the loan payoff period. With a cash-out refinance, they can take out a larger loan and pocket the difference.

But refinancing has its drawbacks and there might be a better alternative.

A mortgage refinance replaces an existing home loan with a new one with a new rate, monthly payment or term that is, hopefully, more favorable to the borrower.

There are two main types of refinancing, which serve different purposes:

• A rate-and-term refinance is for homeowners who want a better rate or different terms.
• A cash-out refinance enables them to access their home equity

In both cases, borrowers typically need a credit score of at least 620 and a debt-to-income ratio no higher than 43%. Similar to a purchase mortgage, borrowers must also cover closing costs, which can amount to as much as 6% of the loan.

Homeowners can refinance with the same lender they used for a purchase mortgage or choose a new provider.

Once the loan is finalized, the lender pays off the existing mortgage. If it's a cash-out refinance, they will disburse the extra funds directly to the borrower.

Pick a refinance lender based on your priorities and preferences. Get quotes from several lenders before making a decision.

1. For a lower rate

If you're refinancing to get a lower rate, Better has some of the lowest on the market. If you refinance on a Better purchase mortgage within three years, it will provide up to $3,500 in closing cost credits.

Make sure your credit score is as high as possible before applying. A credit score of 760 or above will typically secure you the best rates.

2. To tap home equity

If you're looking to cash in on your home equity, United Wholesale Mortgage (UWM) is a great choice for a cash-out refinance. It will lend up to 90% of a home's value, exceeding most lenders.

To maximize the amount you can cash out, pay down existing debt to lower your debt-to-income ratio.

3. For better customer service

If you're refinancing because you're unhappy with the service you're getting, Rocket Mortgage earned an A+ from the Better Business Bureau and consistently ranks high on J.D. Power's customer satisfaction surveys for both mortgage origination and servicing.

Its easy online application made CNBC Select name Rocket one of the best mortgage lenders on the market.

Refinancing might not be the answer. These alternatives could save you money and reduce the impact on your credit score.

Alternatives to rate-and-term refinancing

If you're refinancing to secure better rates or terms, consider:

Requesting a rate adjustment: Some lenders, such as Navy Federal Credit Union, will adjust your rate without refinancing and save you thousands in closing costs.

Recasting your mortgage: If you have extra funds on hand, you could reduce your monthly mortgage bill by making a large lump sum payment and then recasting the mortgage with the new, smaller principal amount.

Mortgage loan modification: If you're aiming to get a lower monthly payment because of an unexpected financial crisis, like a job loss, you can ask your lender for a loan modification, which changes the terms of your loan, the interest rate you pay, or both. You'll have to prove you can make the new payments by providing pay stubs, bank statements, tax returns and other financial documents, as well as a hardship letter explaining your circumstances.

Alternatives to cash-out refinancing

There are other ways to access  without refinancing the entire mortgage. 

: This is a second mortgage secured by the value of the house. The loan can range from $10,000 to $500,0000, given in one lump sum and repaid monthly over 10 to 30 years. 

: Another home equity product, a HELOC lets you withdraw up to an approved maximum during a 10-year draw period, while making interest-only payments. After the draw period ends, you'll repay the loan plus interest, typically over a 20-year term. 

: You can sell a portion of your home's current and future value to a home equity investment company. In exchange, you'll receive a lump sum that must be repaid when the home is sold or in 30 years, whichever comes first.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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