New Jersey Refinancing Definition
Refinancing refers to the replacement of an existing debt obligation with a debt obligation under different terms. The most common consumer refinancing is for a home mortgage.
If the replacement of debt occurs under financial distress, it is also referred to as debt restructuring.
A loan (debt) can be refinanced for various reasons:
- To take advantage of a better interest rate (which will result in either a reduced monthly payment or a reduced term)
- To consolidate other debt(s) into one loan (this will result in a longer term)
- To reduce the monthly repayment amount (this will result in a longer term)
- To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
- To free up cash (this will result in a longer term)
Refinancing for reasons 2, 3, and 5 is usually undertaken by borrowers who are in financial difficulty in order to reduce their monthly repayment obligations, with the penalty that they will take longer to pay off their debt.
In the context of personal (as opposed to corporate) finance, refinancing multiple debts makes management of the debt easier. If high-interest debt, such as credit card debt, is consolidated into the home mortgage, the borrower is able to pay off the remaining debt at mortgage rates over a longer period.