Lending term
Refinancing
Replacing an existing loan with a new one
Definition
Taking out a new loan to repay an existing one, usually to change the rate, the term, the lender, or the amount borrowed.
In more detail
Refinancing is an arithmetic exercise rather than an automatic saving. The comparison is between the remaining cost of the current loan and the total cost of the replacement, including valuation fees, legal costs, and any early repayment charge on the loan being closed.
A break-even point — the number of months of lower payments needed to recover the switching costs — is the usual test. If the borrower expects to move or repay before that point, refinancing costs money rather than saving it.
Example
Switching costs 2,000 in fees and reduces the monthly payment by 120. The break-even point is roughly 17 months of holding the new loan.
Frequently asked questions
Does refinancing restart the loan term?
It can. Many refinances reset to a fresh full term, which lowers the payment but can increase total interest. A term matched to the remaining years avoids that effect.
Glossary entries are general explanations, not advice. Where a term appears in a contract or policy, the definition in that document governs.