What Does Refinancing Mean?

Refinancing means you're replacing an existing loan with a new one — or possibly more than one — that will hopefully contain better terms. You might be considering the refinance option for any of the following reasons:

  • To cut your overall borrowing costs: Replacing one loan with another with a lower rate, and therefore a lower payment each month, can save thousands over the life of the loan.

  • To bring your finances onto firmer footing: If you suspect interest rates are heading up, you might want to replace your current adjustable-rate loan with a fixed-rate loan with predictable payments.

  • To pull cash out for a variety of needs: If you've built up equity in the property, you can arrange to pull cash out to pay bills, help your kid with college tuition, or renovate your house.

  • To get rid of private mortgage insurance: If your down payment was less than 20 percent when you bought the home, and your home appraises higher at the time of the refinance, you might be able to get a lower payment and drop PMI as well.

  • To build up equity at a faster rate: If you want to pay off your mortgage in less than the thirty-year term, you can replace that term with a shorter-term loan that builds up equity faster.

  • A refinancing loan is no different than the loan you got when you bought the property, except in the treatment of points (discussed in the sidebar on page 230). The application and closing process is basically the same, right down to the fees and stacks of paper you'll be signing. The only difference is that you're not moving, you'll hopefully be paying less, and you may be trading equity for cash.

    1. Home
    2. Mortgages
    3. Refinancing: How to Do It Right
    4. What Does Refinancing Mean?
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