Define: Refinancing

UK Accounting Glossary

Definition: Refinancing



What is the dictionary definition of Refinancing?

Dictionary Definition


finance One or more loans or other borrowings that repay and replace previous financings.

Refinancing is the act of restructuring a debt or replacing it with new debt, having different terms. Borrower motivations for refinancing vary. The objective of refinancing could be to lower monthly debt payments, to reduce interest expense, or perhaps to increase borrowing. Refinancing is routine with residential mortgages but can occur with any type of debt and debtor. A mortgage that is a refinancing of an existing mortgage is sometimes called a refi mortgage, or simply refi, as opposed to a purchase mortgage. Mortgage refinancing is highly cyclical, tending to rise when interest rates are falling. In a mortgage refinancing transaction, the term cash-out refinancing describes a situation when a homeowner uses accumulated home equity as collateral for additional principal. Typically, refinancing a mortgage has significant transaction costs. An exception is what is called streamlined refinancing, when the borrower slightly changes terms with the same lender, often receiving only a lower rate. The typical streamlined refinancing dispenses with much of the documentation and closing costs associated with a typical mortgage refinancing transaction.


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Full Definition of Refinancing


Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. The most common consumer refinancing is for a home mortgage.

Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to pay off other debts, to reduce one’s periodic payment obligations (sometimes by taking a longer-term loan), to reduce risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to liquidate some or all of the equity that has accumulated in real property during the tenure of ownership.

It is advisable to speak with a financial professional, familiar with your existing home loan, before deciding to refinance. Certain types of loans contain penalty clauses that are triggered by an early payment of the loan, either in its entirety or a specified portion. Also, some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.

Balance Transfer Catches

People often resort to “Balance Transfer”, a facility provided by Credit Card companies. This is highly beneficial if you understand all the terms and conditions and confirm them at the time of making a transfer.

Balance transfers offer a very low rate of interest (APR) or some cards have an offer of 0% APR on balance transfers. So how do you gain here? Pay off your existing high-interest loan with the amount that you transfer and keep repaying this loan from balance transfer till you finish off before the deadline after which the APR shoots up to your normal APR (typically anywhere between 10% to 20%)

There are two catches here though. Credit card companies have a policy of applying your payments to the balance with the lowest APR. Confused? Let’s take up a scenario.

Let’s say you already have a balance of $350 on your card and your purchase APR is 15%. Now, you make a balance transfer of $2,000 on your card for 0% APR. Now the monthly payments that you make, they will apply completely towards those $2,000 that you transferred. The balance of $350 from the purchase stays on accruing interest on that at the rate of 15%APR.

This also suggests that you should not use the same card to make any purchases after you make a balance transfer using that card. The reason is the same as explained above. Any monthly payments that you make is going towards your balance transfer letting the purchase balance to accrue interest at a higher APR!

So, what does this tell you? DO NOT MAKE A BALANCE TRANSFER ON YOUR CREDIT CARD UNLESS YOU HAVE A $0 BALANCE ON IT.

Also, ONCE YOU MAKE A BALANCE TRANSFER USING A CARD DO NOT USE THAT CARD TO MAKE PURCHASES UNLESS YOU CLEAR OFF THE BALANCE TRANSFER LOAN.

I apologize for screaming here but there are so many people out there who get trapped into this because of two reasons, one, they are not aware and second, the credit card companies won’t caution them. Hey, after all, credit card companies are here to rip us off!!

Please have this tattoo in your brain!! Having said that, balance transfers are a great way to kill those high-interest loans as long as you pay your monthly dues on time. If you default you lose your low APR and the balance transfer APR shoots up to your original purchase APR.

 

 


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Refinancing. PayrollHeaven.com. Retrieved April 02, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/refinancing/

Definition Sources


Definitions for Refinancing are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th February 2020.