A Refinancing loan isn’t really a unique and specific type of loan – though it may seem like it sometimes. Rather, it is part of a financial strategy to lower your overall interest expenses and optimize your cash flow. You can refinance virtually anything that has surplus value over and above what is currently owed. For the past 10 years, though, very low mortgage interest rates have fueled a thriving market for home refinancing. This is simply the process of paying off an older, more expensive loan (or loans) with a new and lower interest rate loan.
In some cases the new loan simply replaces the old loan principal (no cash out) with lower monthly payments. In other cases, if you’ve run up a significant amount of consumer debt – usually at rates well above mortgage rates (and different, more expensive interest computation methods), it may make sense to consolidate those amounts owed into the new home loan – assuming sufficient equity exists – and clear your consumer debt. This financial strategy results in total lower interest expense and reduced total cash out flow each month.
Also, when significant home equity exists and a lower interest rate benefit is to be gained, many home owners will refinance to get cash out of their home. This surplus cash can then be invested in stock or other debt instruments that have a higher yield than the low mortgage interest rate being paid.