Refinancing
The refinancing term refers to the process of replacing an existing loan with a new loan, in order to obtain better debt terms. Refinancing can be done on both personal and business loans.

Reasons for Refinancing

Most people and businesses refinance their loans to simply get lower interest rates, thus reducing their interest costs. Refinancing to get a lower interest rate is possible when interest rates in general are trending down.

Another reason for refinancing is to extend the debt repayment period. By extending the loan repayment period the borrower can get lower monthly payments. If a borrower wants to payoff a debt obligation faster, then they can refinance the loan with shorter amortization period.

Some borrowers refinance to reduce the risk of rising interest rates, by refinancing from a variable rate loan to a fixed rate loan. Other borrowers do the opposite and refinance their fixed interest rate loans into adjustable rate loans, to take advantage of falling interest rates.

Popular Types of Refinancing

The most popular refinancing type is mortgage refinancing. The mortgage refinancing can be done to get more favorable mortgage loan conditions, effectively reducing the borrower's monthly payments. If the mortgagee has other expensive debt (credit card debt for example) or they need cash to renovate their home, they can refinance their mortgage using part of the equity in their home to repay the expensive debt or get cash. For example Joe has a mortgage with outstanding amount of $300,000 with Royal Bank of Canada and he has $100,000 equity in his house. Joe wants to pay off his $10,000 credit card balance and he needs $15,000 to buy a truck for his business. He asks his bank if they would refinance his mortgage adding $25,000 to it and giving him the $25,000 in cash. The bank says yes, and Joe uses the 25K to repay his credit card debt and buy a vehicle. This way he has replaced his high-interest credit card loan with the lower interest rate mortgage loan and he had enough cash left to buy a car. However now he owes $325,000 on his mortgage and has only $75,000 equity in his house. During the housing boom in the beginning of the 21st century, many home owners refinanced their properties, in order to cash in on the high real estate prices.

Thing to Consider When Refinancing

If you have a fixed term loan, and you want to refinance it, check your debt agreement to see what penalties the lender will impose in case you repay your loan early. After you know how much will be the penalties you can calculate if it is worth it to refinance, by simply subtracting the early repayment penalties and other refinancing costs from the projected savings from the loan refinancing.



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