Refinancing

Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms.

Refinancing may be undertaken to reduce interest costs, to extend the repayment time, to pay off other debts, to reduce one's periodic payment obligations, to reduce or alter risk , and/or to raise cash for investment, consumption, or the payment of a dividend.

Refinancing can alter the monthly payments owed on the loan either by changing the loan's interest rate, or by altering the term to maturity of the loan. More favorable lending conditions may reduce overall borrowing costs.

Refinancing is also use to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various indicies used to calculate them.

In the context of personal finance, refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. This can allow a lender to reduce borrowing costs by more closely aligning the cost of borrowing with the general creditworthiness and collateral security available from the borrower.

No-Closing Cost Type

Borrowers with this type of refinancing typically pay few upfront fees to get the new mortgage loan. In fact as long as the prevailing market rate is lower than your existing rate by 1.5 percentage point or more, it is financially beneficial to refinance because there is little or no cost in doing so.

Cash-Out Type

This type of refinance may not help lower the monthly payment or shorter mortgage periods. It can be used for home improvement, credit card and other debt consolidation if the borrower qualifies with their current home equity; they can refinance with a loan amount larger than their current mortgage and keep the cash difference.