Let’s say you took out a variable rate mortgage and interest rates are climbing. You’re starting to get worried that you won’t be able to keep up with your mortgage payments because higher interest rates mean higher monthly payments. What can you do? Are you stuck with your original loan terms forever? No, not necessarily thanks to the concept of refinancing.
Refinancing simply means replacing an existing loan with a new loan, presumably with better terms. Basically, you take out a second loan, use the new loan to pay off the first, and then pay back the new loan in monthly installments just like before, only with a better deal. Refinancing can mean lower monthly payments, a lower interest rate or a change in the length of the loan, depending on what you negotiate with your lender. Refinancing is also a time consuming and sometimes expensive process, so it’s important to think through your options carefully before refinancing.
