From ArticleWorld

Refinancing may be termed as the practice of paying off one loan with the proceeds from a new loan using the same property as security. It is generally done to secure better loan terms as a means to settle one loan and obtain another. Homeowners who were holding mortgages at 8% interest may have been able to refinance into a 5% loan. Another name for refinancing is loan consolidation while in Britain it is known as re-mortgaging.

Reasons for refinancing

Homeowners choose to refinance for a wide variety of reasons. Some of the more popular ones are to:

  1. obtain a lower interest rate;
  2. build equity fast
  3. change type of loan
  4. take advantage of an improved credit rating
  5. draw on the already accrued equity

Obtaining a lower mortgage interest rate can lower the monthly payments of the insured and is the most common reason why homeowners refinance. Another popular reason is building equity faster because owning a home can be one of the safest and most profitable investments one can make.

The catch

There are certain loans that may not be repaid before the expiry of a certain period. Doing so attracts penalty which has to be paid by the borrower. Then again there are hidden clauses in many loan proposals, so that the new loan seems attractive than the original loan, but actually entails much higher rate of interest, over the whole life of the loan.