What is Refinancing?

Refinancing a loan is a popular method of changing or reducing payments for an existing loan.

A good example is when someone takes a new secured loan on collateral for which they already have a secured loan , such as a mortgage refinancing.


There are many good reasons to consider refinancing. Many times, lenders find themselves locked into situations that are not only hard to combat, but often financial debilitating. High interest rates are almost always the cause for this and it usually has to do with early financial success that might wane or an economy that shifts rapidly without your financial means shifting to match it. If the cost of food and gas increases 300% and you are still making the same amount of money, a mortgage payment that was once well within your means becomes suddenly much harder to maintain. Refinancing offers an option to take on a new loan with a more realistic rate that you can afford.

When refinancing a mortgage, the second loan is used to repay the first loan and is often a better loan than the one you originally obtained. Your home is still used as collateral and nothing changes in regards to the terms (in most cases), but the payments you make, as well as the time it might take to pay the loan off will change. Whereas you may have been paying 30% of your salary for the next 23 years on your home, you might now be paying 20% for the next 30 years. These terms are of course highly variable and will depend on your situation, the equity of your home, and what your new financial institute is willing to offer.

Knowing when to refinance is half of the problem for many people. They think they can wait a little longer or that they may not be eligible to do so, but the earlier you consider your options, the better off you will be. Any time you can lower your interest rate, even by as little as 1%, you should consider refinancing. Waiting for a major dip in rates or for your credit to improve while you make massive, debilitating payments is not a good way to go.

Even when a refinanced loan saves you money on monthly payments, there are instances when a loan may cost you more money or time, or when penalties and fees can be just as debilitating as your previous payments. Your best option because of this is to contact a financial professional and discuss your options at length. Make sure you know exactly what you are getting and what you will be paying before you sign anything.

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