Refinancing refers to applying for a
secured loan intended to replace an existing loan secured by
the same assets. The most common consumer refinancing is for a
home
mortgage.
Refinancing advantages:
Refinancing may be undertaken to
reduce interest costs (by
refinancing at a lower rate), to extend the repayment time,
to pay off other
debts, to reduce one's periodic payment obligations (sometimes
by taking a longer-term loan), to reduce risk (such as by
refinancing from a variable-rate to a fixed-rate loan), and/or
to liquidate some or all of the
equity that has accumulated in real property during the
tenure of ownership.
In essence, refinancing a
mortgage or other type of loan can lower the monthly
payments owed on the loan either by changing the loan to a lower
interest rate, or by extending the period of loan, so as to
spread the re-payment out over a long period of time. The money
saved can be used to pay down the principal of the loan, thus
further reducing payments. Alternately, refinancing can be used
to transform available equity in one's house into ready cash,
available for other purposes or expenses.
Another use of refinancing is 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
prime rates used to calculate them. By refinancing an
adjustable-rate mortgage into a fixed-rate one, the risk of
interest rates increasing dramatically is removed, thus ensuring
a steady interest rate over time.
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. The net savings between the two
interest rates can then be applied either towards further paying
down the debt, or other purposes. In addition, non-tax
deductible debt, such as credit card or car loan debt, can
be transformed into tax-deductible debt such as home
mortgage debt, potentially lowering one's taxes or shifting
one into a more advantageous tax bracket. This type of
arrangement is often associated with a
Cash-Out Refinance.
