Refinance

In simple terms, the objective of a refinance is to replace an older loan with a new loan with more attractive terms (lower rate or change the term). The most common type of refinancing is refinancing a home mortgage. In a refinance, the money from the refinance loan is used to pay off an existing mortgage. The loan amount of the new mortgage is based on the house’s new appraised value.

Other more complex reasons for doing a refinance could be to pay off other debts, to reduce one's current payment obligations (often accomplished by extending the term of the loan), to reduce risk (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 period of ownership.

Some refinance loans contain penalty clauses that are triggered by early payments of the loan, either in its entirety or a particular 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.