What Is Refinancing?

Refinancing is a term that you probably head about over the dinner table growing up, or in a stressed conversation from your parents. Maybe your friends have talked about it; but what is refinancing really? This popular financial buzzword is a lot easier to understand than you might think.

Formal definition

First, look at the formal definition of refinancing. According to Google definitions it is, "Finance (something) again, typically with a new loan at a lower rate of interest." This is most likely applied to real estate for most individuals. You always hear about people refinancing their house, mortgage, etc.

What it means

Take for example, someone with a credit score of 600. They apply for a loan on a house that is $200,000. The lender approves or denies the application and the buyer pays a certain rate (which is probably fairly high in this instance) of interest on the loan. Then, maybe a year later the credit score goes up 100 points and is now 700. At the same time, the property value of the house increases as well. The owner can get the house refinanced; in this case the interest rate on the loan decreases because the property owner is more stable to the lending company.

This article describes refinancing in a nutshell; it is not too complicated of a subject, but it is especially important to consider based on the status of the housing market in today's economy.