What Is Refinance?

What Is Refinance?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Refinance refers to obtaining a new loan with different terms to replace an existing loan. This process is common in the mortgage industry. Essentially, a borrower takes on a new loan to pay off the original loan. The reason for doing this often includes a lower interest rate, shorter loan term, or to switch from a variable interest rate to a fixed rate. Other reasons may also include consolidating debt or raising funds for large purchases.

Related Questions

1. When should you consider refinancing your loan?

Consider refinancing your loan when interest rates have significantly dropped since you got your original loan, your credit score has improved, or you want to change the loan term.

2. What are the costs associated with refinancing?

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The costs can include things like application fees, loan origination fees, and appraisal fees. Other possible costs include points or loan discount fees, and prepayment penalty from your current lender.

3. What is cash-out refinancing?

Cash-out refinancing happens when you refinance your loan for more than you owe on your original loan. The difference between the two amounts is given to you as cash, which you can use for whatever you need.

4. What is the difference between refinancing and loan modification?

While refinancing involves getting a new loan to replace your existing loan, loan modification alters the terms of your existing loan with your current lender, often because of financial difficulties.

5. Can refinancing multiple times harm your credit score?

Each time you apply for refinancing, it can slightly reduce your credit score. However, the impact usually isn’t large. Just make sure you space out your refinancing applications to minimize the impact.