Refinancing is when a loan borrower obtains a new loan to replace the existing loan.

Typically this is done to reduce an interest rate, or finance over a different period of time (say back out to a new 30 years or down to 15 years). It is done either to lower monthly payments, pay off a debt in fewer years, switch between an adjustable rate mortgage to a fixed rate one, or to obtain some cash back through a cash-out refi.

The new loan pays off the old loan and you just make payments on the new loan. Note that you will have to pay a refinancing fee, or points. Refinancing to a rate 1 percent or less than what you currently have may not be worth it based on how long you plan to stay in your home.

Your break-even date on that fee could be several months or a few of years out. Say your break-even date is 3 years out, but you move in two years — you have not made back the savings of the refinancing.

Do this calculation before you undertake a refinancing — these refinance calculators can help.

Posted in Refinance Glossary.