What Does It Mean to Refinance a Mortgage?

A borrower refinances a mortgage by paying off the original mortgage and replacing it with a new one. In other words, the borrower takes out a new loan, secured by the property, and uses that money to pay off the remaining amount owed on the first loan. The new loan will have new terms and a different interest rate, but the property used to secure the loan (the mortgaged property) will be the same.

When refinancing, the borrower's goal is to obtain better mortgage terms, usually in the form of a lower interest rate or a shorter total repayment period. Refinancing will also allow the borrower to potentially convert from a fixed-rate mortgage to an adjustable-rate mortgage, or the other way around, in order to take advantage of changes in market interest rates.

Because the borrower is already the owner of the property, the process of refinancing and obtaining a new loan is often easier than the process of obtaining the original loan. Additionally, the longer the borrower has owned the property, the more equity that borrower will have built up in the property, and so the easier and more favorable refinancing will likely be.