REFINANCE
Refinancing
refers to the replacement of an existing debt obligation with a debt obligation
bearing different terms. 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 or alter risk (such as by refinancing from a variable-rate to a fixed-rate
loan), and/or to raise cash for investment, consumption, or the payment of a
dividend.In essence, refinancing can alter the monthly payments owed on the
loan either by changing the loan's interest rate, or by altering the term to
maturity of the loan. More favourable lending conditions may reduce overall
borrowing costs.
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 indices 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. This flexibility comes at a price as lenders typically charge a risk premium
for fixed rate loans.In the context of personal (as opposed to corporate) finance,
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. This can allow a lender to reduce borrowing costs by more closely
aligning the cost of borrowing with the general creditworthiness and collateral
security available from the borrower. For home mortgages, in the United States,
there may be certain tax advantages available with refinancing, particularly
if one does not pay Alternative Minimum Tax.(1)
Source (1) Wkipedia