Home Equity Loan
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 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.
Certain types of loans contain penalty clauses that are triggered by an early
payment of the loan, either in its entirety or a specified portion. Also, some
refinanced loans, while having lower initial payments, may result in larger
total interest costs over the life of the loan, or expose the borrower to
greater risks than the existing loan. Calculating the up-front, ongoing, and
potentially variable costs of refinancing is an important part of the decision
on whether or not to refinance.