Glossary

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Refinancing

Definition

Refinancing means replacing one loan with a new, better loan. Improving the terms of a loan can mean:

  • Obtaining a lower interest rate
  • Getting a lower monthly payment
  • Replacing an adjustable or variable rate loan with a fixed-rate loan
  • Increasing the size of the loan and taking the difference in cash.

Auto loans, student loans, credit cards and other types of debt can be refinanced, but most of the time when people discuss refinancing, they are referring to mortgage refinancing.

Mortgage Refinancing

Mortgage refinancing can take several forms. Here are the most common:

  • Rate and term refinance: This means replacing one loan with another without increasing the loan size. Only the rate and / or terms are changed.
  • Limited cash-out refinance: This refinance results in a larger loan because the refinancing costs are added to the loan balance instead of being paid out-of-pocket by the borrower.
  • Cash-out refinance: This involves replacing one loan with a larger loan and taking the difference in cash.
  • Streamline refinance: This is a special kind of rate-and-term refinance in which the current mortgage lender is the one that refinances the loan. Underwriting is much less complex – the borrower’s credit, income and employment may not be checked, and an appraisal may not be necessary. This is because the lender is already “on the hook” if the borrower defaults on the loan, but improving its terms might make default less likely.

When refinancing a mortgage, homeowners should make a point of comparing mortgage quotes from several competing mortgage lenders. Home loan rates and terms can vary a great deal between mortgage lenders, and studies have shown that obtaining at least four loan quotes significantly increases the homeowner’s change of getting the lowest rate available.

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