by 
The Curious Bag
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When a borrower refinances his mortgage, he repays the original debt with a new loan. The new loan will have a different term and rate, and sometimes, a different loan amount.
Significance
A mortgage refinance can either allow a borrower to take advantage of lower interest rates or it can allow him to use the equity built up in the home for other purposes.
Function
If the refinance lowers the interest rate, the borrower may have a lower monthly payment as well as reduced interest expense over the life of the loan.
Types
A rate and term refinance simply changes the rate and term of the loan. A cash out refinance allows the borrower to "cash out" or use the equity in the home for other purposes, which in turn increases the loan amount of the mortgage.
Considerations
With a rate and term refinance, a borrower will see a benefit to the mortgage refinance if the interest rate is at least one percent lower than his current interest rate.
Benefits
Using a cash out refinance can allow a borrower to consolidate several forms of debt into one lower monthly payment. The borrower can increase his mortgage debt on his house to pay off other debt, if he owes less than the house is worth.
Source:
FederalReserve.gov: A Consumer's Guide to Mortgage Refinancing
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