What Is the Purpose of Refinancing?

by George N. Root III ; Updated July 27, 2017

Refinancing a loan is the process of taking the remaining loan balance and applying a new loan to it. The old loan is paid off and the new loan takes its place. There are several benefits to refinancing a loan that make it an attractive financial option to many consumers. Become familiar with the purpose of refinancing in order to determine whether or not it is a viable option for your situation.

Variable Interest

One of the reasons people refinance a loan is to get a fixed interest rate, according to the Home Loan Center website. A variable rate mortgage can have unpredictable monthly payments that can vary widely from year to year. A fixed interest rate mortgage means having the same payment and interest rate for the term of the loan. Refinancing to get a fixed interest rate loan also helps to reduce your overall interest debt by keeping you on a lower fixed rate.

Monthly Payments

A refinanced loan will have a lower principle balance to start with, which means there is less money on the loan itself. If you can get a refinance with a lower interest rate than your original loan, then the lower principle balance coupled with the lower interest rate will lower your monthly payments. The reason that people do this is to help lower the monthly cost of their debt and get it down to a number that they can more easily afford.

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Change in Ownership

When there is a divorce or a separation of business partners, the jointly owned property will still have both parties on the loans. Refinancing the loans will shift sole ownership to the party that took on the debt. This can also be done to remove co-signers from a loan. In other cases, you can refinance a loan with a new co-signer to remove the original co-signer from the debt.

Change Lenders

Some borrowers may want to change lenders because they do not like doing business with their current lender. The consumer may feel that her current lender may become too aggressive when calling about late payments, or the lender may make clerical errors on the account on a consistent basis that can take weeks to correct. In other cases, a different lender may be able to offer a lower interest rate or better loan terms. The consumer makes the decision to change lenders and uses refinancing to make the move.

About the Author

George N. Root III began writing professionally in 1985. His publishing credits include a weekly column in the "Lockport Union Sun and Journal" along with the "Spectrum," the "Niagara Falls Gazette," "Tonawanda News," "Watertown Daily News" and the "Buffalo News." Root has a Bachelor of Arts in English from the State University of New York, Buffalo.

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