Financial Dictionary -> Loans -> Refinancing

Refinancing or "rolling over" is a financial technique applied to loans, mortgages and other forms of money borrowing. In its basic form it simply means utilizing the money obtained from a new loan to pay off an existing loan. This can be used strategically to save money or is often used by people in financial difficulties who see no other option than to start a nasty chain of loans, rather than defaulting and losing any collateral put forward in the agreement. Usually during refinancing the same collateral is used to secure the loan, although this is not always the case. The most common type of refinancing is with a mortgage.

Some borrowers may be forced in to refinancing with balloon payments. This is one lump sum that needs to be paid at a loan's maturity. If they cannot afford to make this final payment borrowers often take out a new loan.

If using refinancing strategically in order to save money on interest and fees there are several calculations and things to take in to account to see if it is worthwhile. If using true refinancing (as opposed to just taking out another loan elsewhere) there are several fees that may offset the savings on interest making it a less viable option to take. This is often done with fixed rate interest loans, when interest rates are now a lot lower or vice versa when a fixed rate loan would prove to be better financially in the next few years. Of course this all works on forecasts and predictions and is never set in stone.

There are lots of different reasons why people may refinance, from saving on interest to extending the terms of the loan. If somebody senses they may be going in to financial difficulties, refinancing can give them a longer period of time to pay back the loan. This may mean that in the long term they are paying more, but if for example somebody gets a dock in wages, extending the terms makes it easier to repay on a month by month basis.

A lot of research needs to be done before refinancing because there may be several hidden fees that are not necessarily made clear before going through with the process.