- To refinance a loan is to take out a new loan with more favorable terms to replace your old loan. This can result in lower monthly payments, lower interest rates and free up additional cash. However, it can also significantly extend the repayment period.
What is Refinancing?
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 a previous loan with a loan that has better terms.
Refinancing 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 worsened, 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.