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What Does Refinance Mean?

Aug 17, 2007
The process of paying off one loan with the proceeds from a new loan secured by the same property. When we use the term Refinance, it means a person is replacing his/her current loan with a new loan in order to save money. The loan can be of any type. It can be any consumer debt or a credit card debt or a mortgage. Suppose you think of refinancing your loan the basic rule of refinancing is that the new loan must have a lower borrowing rate then what you are currently paying and even get better borrowing terms. One needs to go through refinancing terms of loans, especially on mortgages.

It is always advised to do your research about borrowing terms and the rate of interest of the new loan. Now, there are some general ways to get better borrowing terms on the new loan. Firstly, you must have a good credit balance. A higher credit balance increases your chances of paying debts. You get a better rating if you have a good balance. A good Rating involves making sure that all your bills are paid on time, no new credit applications are made and keeping your loan balances low.

Sometimes it makes sense to refinance. Sometimes it does not. It basically depends on your personal situation and financial goals. For instance, you may want to lower your interest rate and/or monthly payment, but when you're shopping for a loan to refinance your current debts you need to ask yourself some questions:-
1) Will the interest savings more than offset the costs associated with getting a new loan?
2) Did your credit score improve considerably?
3) Are you willing to pay points to get a lower rate?
4) Will having lower payments more than make up for the closing costs , fees and points if any?

All you need to consider is that the reason for getting a new loan is to save money. On a mortgage, a new refinance mortgage loan could mean thousands of dollars in savings. One must adequately compare different loans that is see the quotes of multiple lenders before making any decision. Also make sure that the lender discloses the fees involved in closing a loan.

Before moving further I must explain the meaning of ARM that is Adjustable Rate Mortgage: Loans with a 30 year term, but have a lower initial interest rate for a fixed period of time. The interest rate may increase or decrease with time. While a Fixed Rate loans have interest rates that do not changeover the life of loan.

As a result, monthly payments for principle and interest are also fixed for the life of the loan, typically 15 or 30 years. One more important thing is that the lowest rate quoted is not always the best rate.

Generally, it is a good idea to get the lowest fixed rate possible, but you also have to consider your situation. If you are in the first year of an adjustable rate mortgage (ARM) and you plan on moving in three years, it probably does not make sense for you to refinance. However, if the rate on your ARM is about to adjust and you think the rate will go up, then it may make sense to get a long term fixed rate mortgage, especially if you do not plan on moving in the next seven years or so.
About the Author
Refinance is a key part of business development strategy used by Nazir on a daily basis. Proper use of this financial instrument depends very much on the quality of information upon which any refinancing decisions are based. For your better decisions, visit refinance now at http://www.123refinancenow.com
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