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Refinancing a mortgage means to get a new mortgage agreement with a different interest rate.

If the prevailing interest rate environment has changed, or if a person’s credit history has strengthened since signing the original mortgage agreement, a homeowner might benefit from refinancing their mortgage with a new arrangement.

The bank or lending institution would effectively pay off the first mortgage with the new one, and give the client a different interest rate or mortgage term (length) or monthly payment amount.

In the case of lower monthly payments, in particular, it is not likely that the borrower will be saving any money long-term; in fact, it is more likely that this arrangement will cost more in the long-run.

A banking customer could also refinance into an adjustable mortgage if they believe that the interest rates will be favorable that way in the long run, but it is more common to refinance into a fixed mortgage if an adjustable mortgage rate is rising.

Refinancing is an entirely different thing than getting a 2nd Mortgage or Home Equity Line of Credit. In those arrangements, a second loan or line of credit is acquired on top of the existing mortgage loan.

Refinancing is the restructuring of a primary, existing mortgage loan repayment plan. Those wishing to refinance must usually pay their original mortgage for at least a year before any new arrangements can be discussed.

The bank that entered into the original mortgage agreement is likely to price refinancing competitively to prevent a client from going to another bank or mortgage company. Sometimes called a “re-fi.”

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