UK Accounting Glossary
Home loan refinancing is the process of paying off a mortgage with the proceeds from a new mortgage on the same home. Broadly, there are two types of home loan refinancing: rate-and-term home loan refinancing and cash-out home loan refinancing. Rate-and-term home loan refinancing is geared toward securing more favorable terms on a new loan (including a lower interest rate, shorter loan term, or different type of loan). The savings from the new terms, however, must be weighed against the costs of home loan refinancing. The purpose of cash-out home loan refinancing may also include securing more favorable terms. But cash-out home loan refinancing also involves taking out a loan larger than the amount owed on the house and pocketing the cash difference. Potential disadvantages of home loan refinancing include PMI (which a borrower would have to pay if he refinances an amount greater than 80% of the equity in his home) and prepayment penalties (included in some, but not all mortgage agreements), which could negate the benefits of home loan refinancing.
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This glossary post was last updated: 9th February 2020.