What is refinancing?

Refinancing refers to the process of replacing an old loan with a new loan, typically to secure better terms such as a lower interest rate, different repayment schedule, or to switch from an adjustable-rate mortgage to a fixed-rate mortgage. This process allows borrowers to potentially reduce their monthly payments, decrease the overall interest they will pay over the life of the loan, or access equity in their property.

By securing a new loan, the borrower pays off the existing debt, which can lead to improved financial circumstances if done wisely. Refinancing can also provide opportunities to borrow additional funds for purposes such as home improvements or consolidating debt, making it a versatile financial tool.

Other options, while related to loans and mortgages, do not capture the essence of refinancing. Taking out a second mortgage refers to obtaining additional financing against a property without replacing the first mortgage, while selling a property is a completely different transaction that addresses debt repayment through asset liquidation. Renegotiating terms may involve discussing conditions of an existing loan but does not constitute the formal act of obtaining a new loan to pay off the old one.