Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets.

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.

It is advisable to speak with a financial professional, familiar with your existing loan(s), before deciding to refinance. 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.

MORE TOPICS IN: Money & Investments