Refinancing
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
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.
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