What Is a Refinance?

A refinance, or refi for short, refers to revising and replacing the terms of an existing 澳洲幸运5官方开奖结果体彩网:credit agreement, usually as it relates to a loan or mortgage. Refinancing a loan or mortgage is typically done to take advantage of 澳洲幸运5官方开奖结果体彩网:lower interest rates or improve the loan terms, such as the monthlജy payment o♔r length of the loan. If approved, the borrower gets a new loan that replaces the original.

Borrowers who 澳洲幸运5官方开奖结果体彩网:refinance following a drop in interest rates can benefit substantially from savings on the 澳洲幸运5官方开奖结果体彩网:total cost of the loan. However, there are many t𓂃ypes of refinancing, each with pros and cons.

How a Refinance Works

Consumers generally seek to refinance certain debt obligations in order to obtain more favorable borrowing terms, often in response to shifting economic conditions. Common goals from refinancing are to lower one's fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a 澳洲幸运5官方开奖结果体彩网:fixed-rate mortgage to an 澳洲幸运5官方开奖结果体彩网:adjustable-rate mortgage (ARM) or vice versa.

Borrowers may also refinance because their credit profile has improved, because of changes made to their long-term financial plans, or to pay off their existing debts by 澳洲幸运5官方开奖结果体彩网:consolidating them into one low-priced loan.

The most common motivation for refinancing is the interest-rate environment. Because interest rates are cyclical, many consumers choose to refinance when rates drop. National monetary policy, the 澳洲幸运5官方开奖结果体彩网:economic cycle, and market competition can be ke🎃y𒈔 factors causing interest rates to increase or decrease for consumers and businesses.

These factors can influence interest rates across꧅ all types ♛of credit products, including both non-revolving loans and revolving credit cards. In a rising-rate environment, debtors with variable-interest-rate products end up paying more in interest; the reverse is true in a falling-rate environment.

In order to refinance, a borrower must approach either their existing lender or a new one with the request and complete a new loan application. Refinancing subsequently involves re-evaluating an individual's or a business's credit terms and financial situation. Consumer loans typically considered for refinancing include mortgage loans, 澳洲幸运5官方开奖结果体彩网:car loans, and 澳洲幸运5官方开奖结果体彩网:student loans.

Businesses may also seek to refinance mortgage loans on commercial properties. Many business investors will evaluate their corporate 澳洲幸运5官方开奖结果体彩网:balance sheets for business loans issued by creditors that could benefit from lower market rates or an🐈 improved credit profile.

Types of Refinancing

There are several types of🦋 refinancing options. The type of loan a borrower decide𒁃s to get depends on the needs of the borrower. Some of these refinancing options include:

Rate-and-Term Refinancing

This is the most common type of refinancing. 澳洲幸运5官方开奖结果体彩网:Rate-and-term refinancing occurs when the original loan is paid and replaced with a new loan agreement from a lender that comes with a lower in🦄terest rate.

Cash-out Refinancing

澳洲幸运5官方开奖结果体彩网:Cash-outs are common when the 澳洲幸运5官方开奖结果体彩网:underlying asset that collateralizes the loan has increased in value. The transaction involves withdrawing the value or equity in the asset in exchange for a higher loan🐈 amount (and often a 🏅higher interest rate).

In other words, when an asset increases in value on paper, you can gain access to tha♌t value with a loan rather than by selling it. This option increases the total loan amount but gives the borrower access to cash immediately while still maintaining ownership of the asset.

Cash-in Refinancing

A cash-in refinance allows the borrower to pay down some portion of the loan for a lower 澳洲幸运5官方开奖结果体彩网:loan-to-value (LTV) ratio or smaller loan payments.

Consolidation Refinancing

In some cases, a consolidation loan may be an effective way to refinance. Consolidation refinancing can be used when an investor obtains a single loan at a rate that is lower than their current♌ average interest rate across several credit products.

This type of refinancing requires the consumer or business to apply for a new loan at a 澳洲幸运5官方开奖结果体彩网:lower rate and then pay off existing debt with the new loan, leaving their total outstanding principal with substantially lower interest rate payment🍬s.

The Pros and Cons of Refinancing

Example of Refinancing

Here's a hypothetical example of how refinancing works. Let’s say Jane and John have a 30-year 澳洲幸运5官方开奖结果体彩网:fixed-rate mortgage. The interest they’ve been payingಌ since they first locked in their rate 10 years ago is 8%. Because of economic conditions, interest rates drop.

The couple reaches out to their bank and is able to refinan🍷ce their existing mortgage at a new rate of 4%. This allows Jane and John to lock in a new rate for the next 20 years while lowering their regular monthly mortgage payment. If interest rates drop again in the future, they may be able to refinance🐷 again to further lower their payments.

Corporate Refinancing

澳洲幸运5官方开奖结果体彩网:Corporate refinancing is the process through which a company reorganizes its financial obligations by replacing or restructuring existing debts. Corporate refinancing is often done to improve a company's financial position and can also be done while a company is in distress with the help of 澳洲幸运5官方开奖结果体彩网:debt restructuring. C💦orporate refinancing often involves calling in older issues of corporate bonds whenever possible and issuing new bonds at lower interest rates.

The Bottom Line

Refinancing allows you to take out a new loan to replace the original 澳洲幸运5官方开奖结果体彩网:mortgage loan. Refinancing is beneficial for borrowers as it results in more favorable borrowing terms. For homeowners, refinancing is a great way to lower the cost of🧔 their mortgages when interest rates fall, allowing them to reduce their loan's current interest rate. Whenever rates drop, it's worth exploring refinancing.