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Definition of Mortgage Refinancing

by Brandon Cornett (© 2009)

Here at the Home Buying Institute, we like to start by explaining the basics of a particular subject and then build on it from there. Such is the case with mortgage refinancing and refinance loans. So in this article, you can get a simple definition of refinancing (as it pertains to a home mortgage).

When you refinance your home, you are essentially replacing your original mortgage with a new one. Ideally, you will secure a lower interest rate through this process. That's why most people refinance, to get a lower rate and thus save money over the life of the new loan.

Mortgage Refinance Defined

So here's our simple definition as promised. Keep this in mind as you conduct further research on our site, and it will all start to make perfect sense:

Home Refinancing -- The process of paying off your existing mortgage with a new one. Most people use refinancing to secure a lower interest rate or to get different / better terms on the new loan (such as going from an ARM to a fixed-rate mortgage).

This definition of refinancing leads to another common question. When does it make sense to do it? The answer to this question is a little more in-depth, so we have written an entire article on this subject. You can find this and other related articles below:

More Articles and Definitions

When Should I Refinance My Home?
This is obviously a question you must answer for yourself. But we can certainly help you do that. In this article, you'll learn how to run the numbers and find out if a refi makes sense for you. You'll also learn another important definition related to refinancing -- the break even point, or BEP.

Getting the Best Refinance Rates
The interest rate you receive on the new loan is a key ingredient for refinancing success. In fact, if you don't lower the rate by the right amount, there's no point in pursuing a refi in the first place. This article explains how all of this works, in plain English.

I hope you found this definition of refinancing helpful, and I wish you well in your financial endeavors. Remember, you need to do the right homework up front to find out if a refi will work for you or not. Some homeowners think that it's always a good idea to refinance a mortgage, but this is simply wrong. You have to improve your financial situation in some way, or else there's no point in moving forward. Use the articles and definitions above to determine if a refinance is right for you.

So, going forward, you must complete the following steps. Figure out how much you owe on your existing mortgage. Your lender can tell you this. Next, find out what your home is worth in the current market (not when you first bought it, but today). Use these two numbers to see if you have any equity in the home. If you don't, then the refinancing definition above is a moot point — you can't refinance when you are upside down in your equity.

However, if you do have some equity in the home (ideally 20% or more), then you could be a good candidate for mortgage refinancing. In this case, use the definitions and articles above to learn more about the process. And when you're ready, apply for a refi loan so you can see what kind of rates and terms the lender is willing to give you. Based on this initial offer, you can determine if it makes sense to refinance in your situation.