Function

• A mortgage is generally refinanced after the borrower has paid down a portion of it. The borrower may refinance for many reasons, such as to take advantage of interest rates that have lowered since the original mortgage was issued, to lengthen the life of the loan, to decrease the size of payments by lengthening the life of the loan, or to make available a large sum of cash. However, in order to successfully refinance the loan, a lender must be able to make a significant profit and the borrower must be able to save money.
  
  

Fees

• There are a number of fees attached to the issuing of a new mortgage. According to the Federal Reserve Bank, a normal mortgage may include a half-dozen or more fees such as an appraisal fee, a lender's inspection fee, an assumption fee and a broker fee. If the cost of these fees outstrips the amount that the homeowner expects to save on their mortgage, the mortgage is probably too small to refinance.
  
  

Taxes

• According to Bankrate.com, an additional factor that must be considered in calculating the cost of refinancing a mortgage is the tax deduction a mortgage holder receives on their interest payments. When a homeowner refinances to a mortgage with lower interest rates, the amount he can deduct will lessen. Often, if the mortgage is too small, this reduction in the tax deduction will about match the savings on interest payments, making the mortgage too small to be effective.
  
  

Size

• While there are a number of reasons why a borrower may find a mortgage too small to be effective, there is a simple reason why a lender might pass on a mortgage that is very small --- they won't make enough money. While a lender will still receive many of the same fees for a larger refinancing, the amount the lender will receive on interest payments may be too small for the loan to be financially worthwhile.
  
  

Expert Insight

• According to Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, a mortgage can generally be considered too small if it is under $50,000. Guttentag says those who cannot receive new mortgages should search for another type of loan, such as an unsecured loan.