Debt Dictionary

Refinancing

Investment Dictionary -> Refinancing

What is refinancing?

Refinancing is replacing an existing debt with a debt obligation, often bearing different and better terms for the borrower. The most popular form of consumer refinancing is for a home mortgage.

What are the advantages of refinancing?

• Refinancing helps in overall improvement of cash flow. Refinancing often offers favorable conditions of lending thereby reducing the borrowing costs. A reduced interest rate can help in altering the equated monthly installments of the loan.
• Refinancing to a fixed – rate loan from a variable rate reduces the risks related to the payment of the existing loan. Variable interest rates of loans generally shift up and down based on various market movements. By shifting to a fixed rate of interest in a loan the risks are considerable reduced. There is no chance of interest rates skyrocketing at any point of time.
• Sometimes refinancing a loan for personal borrowers can help them pay off other high – interest debts like credit card debt.
• By taking a longer – term refinancing loan, one might be able to lower one’s periodic obligations of payment.
• There are certain tax advantages that come with refinancing home mortgages in the U.S.

Types of refinancing

• No closing cost type of refinancing: In this case only a few upfront fees are paid to get a refinancing or a new mortgage loan proving to be highly beneficial to the borrowers in the long run.
• Cash out kind of refinancing: The borrower is eligible to apply for a refinance on a higher amount provided he qualifies with his present home equity.

Refinancing debts often come with penalty clauses for early repayment of the loan. There may also be a few other transaction fees. The borrower has to weigh the pros and cons before going in for refinancing.


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