Definition
A consumer may refinance an existing loan by obtaining a new loan to pay off the old loan.
Analysis
Refinancing is done for a variety of reasons. Many consumers refinance a loan in order to:
- Obtain a lower interest rate
- Extend the term of the loan
- Shorten the term of the loan
- Cash out equity
- Seek a lower monthly payment
Refinancing a home mortgage is the most common form. Some consumers that have a fixed rate mortgage may find that mortgage rates have dropped since they closed on their loan.
Many mortgage professionals caution that a homeowner should avoid refinancing if the new rate is less than a full percentage point lower, or if they do not plan to own the home for many years. Often times the costs associated with refinancing a mortgage may take many years to recoup through lower interest rates.
Some homeowners want to refinance because they have an adjustable rate mortgage (ARM). They may be facing a rate hike that could substantially increase their monthly payment.
Vehicle loans are sometimes refinanced also. The usual reason is to obtain a lower interest rate than what the current loan charges.
Refinancing is the tool of many mortgage brokers that are looking to double up on profits. They may pressure borrowers to agree to a predatory mortgage loan, only to flip it a year later. That way, they earn commissions on two sales.
