What does it mean to refinance?
The act of refinancing is different than debt consolidation, which involves combining multiple loans into a single loan, ideally with a lower interest rate. Debt consolidation is focused on reducing the number of debts that a person has. To refinance does not lower the number of debts. It merely replaces an old loan with a loan that has better terms.
Refinance is also different than a second mortgage. When a person refinances their home, they are paying off their old mortgage with a new mortgage. When a person takes out a second mortgage on their home, they are taking out another loan that also uses the home as collateral. The old mortgage is not paid off when a person takes out a second loan.
Refinancing a home is best done when the borrower’s financial situation has improved from when they took out the original loan. A higher credit score, less consumer debt and a higher income can qualify the borrower for a better interest rate. If the borrower’s financial situation has grown worse, it is a bad idea to refinance their loan as they will not qualify for more favorable rates.
Successfully refinancing a loan can result in lower monthly payments and less interest paid overall.
- Barlowe, Brett. “What Does It Mean to Refinance Your House?” SFGate. Accessed January 19, 2016 http://homeguides.sfgate.com/mean-refinance-house-9573.html