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Refinance is a term used in the banking institution. A refinance takes place when a borrower wants to take out another loan to pay off a current loan, usually with different terms. The most common refinance is that of a home mortgage. Many home mortgages are taken out as an A.R.M, which is an adjustable rate mortgage. With an adjustable rate mortgage, the interest rate fluctuates along with the current market rate. In other words, when the current market rate goes up, the interest on your loan also goes up whereas if it goes down, so will your interest rates go down.
from:In some circumstances, this can work to a borrower's advantage. However, when the stock market is shaky, an A.R.M. can put a borrower at a very high disadvantage. When the current market rate goes up and causes your interest to go up, this often causes your monthly payment to go up. Many borrowers will use this opportunity to refinance their home either at a different lending institution or at the same one but with different terms.
Another type of home mortgage is an amortization that is ballooned. For instance, they interest rate is fixed at a certain percentage and amortized for 20 years, but the loan is ballooned for 3 years. At the end of the 3 years, the loan comes up for renewal so the borrower will have to refinance for another 3 years or whatever length they and the lender agree upon. Sometimes, the lender and borrower will do what is referred to as a "straight renewal" where the terms such as interest rate and payment amount stay the same, but the loan is just extended for another length of time.
Many times borrowers refinance their home mortgage to consolidate their other debts as part of their loan. It's like a new loan because additional funds are given out, yet the home mortgage part of it is a refinance.
Although home mortgages are the most common type of refinance, they are not the only type of loan that can be refinanced. An auto loan, personal loan or any type of loan can be a refinance. The reasons may be to add additional funds, to get better interest rate, to switch lending institutions or because the term of the loan is up. When you do refinance any type of loan, always shop around for the best interest rates and terms. Just because you're getting the loan from your own bank isn't a guarantee that you are getting the rest deal. Banks will often give new customers better rates as a way to draw in new business. If this happens with you, you may be able to use this as leverage with your bank to be competitive.
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