Refinancing refers to the replacement of an existing debt obligation with a debt obligation under different terms. The most common consumer refinancing is for a home mortgage.
If the replacement of debt occurs under financial distress, it is also referred to as debt restructuring.
A loan (debt) can be refinanced for various reasons:
- To take advantage of a better interest rate (which will result in either a reduced monthly payment or a reduced term)
- To consolidate other debt(s) into one loan (this will result in a longer term)
- To reduce the monthly repayment amount (this will result in a longer term)
- To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
- To free up cash (this will result in a longer term)