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Consumer Credit: What Is Refinancing?

Participating in life often means buying a home, going to dinner, paying for school, traveling with family and all of these activities take money. If you're one of the lucky few who have unlimited financial resources then you can pay cash for all these things and will never need credit. But for most of society, we take out loans via mortgages and credit cards which come with terms such as interest rates and minimum monthly payments.

If your hours have been cut at work or you have to go part time while attending school or have gotten in over your head financially then refinancing existing debt is a wonderful tool to get your financial life back on track. Refinancing is a basic concept of taking an existing loan and either working with that lender on new loan terms or moving the loan to a new institution to get better terms on the outstanding debt. Better terms can include a lower interest rate, smaller monthly payments or reduction of fees and penalties.

Home Refinancing

Refinancing a home loan happens most often because the homeowner has hit a financial bump in the road or interest rates have lowered significantly. A common rule of thumb is when current mortgage rates are two percentage points below your existing mortgage rate then that's the time to refinance. Even though closing costs on refinancing a home loan may be $3,000 to $4,000 the money saved on interest over the years will more than offset the initial upfront cost.

Credit Card Refinancing

Most financial advisers and other individuals don't really call it credit card refinancing but that is exactly what it is when you move an existing credit card balance which has a high interest rate to a new or different credit card with a lower interest rate. Ideally you can refinance outstanding credit card debt with the existing credit card company by simply asking for a lower interest rate.

If the your credit card company doesn't want to renegotiate the terms of the loan by lowering the interest rate or waving penalties and fees then hopefully you can still do a balance transfer to another credit cards or open a new credit card with another financial institution.

Lower Payments

Most people refinance outstanding debt because they are having a difficult time making monthly payments. When a homeowner refinances a mortgage, while it's nice to pay a lower total interest over 30 years, more often than not they are refinancing to have their monthly mortgage payment drop a few hundred dollars.

Credit card balances are often transferred from a high interest rate credit card to a lower interest rate credit card for similar reasons. Going from 16.9% interest to 8.9% interest or better yet to 0% interest for 12 months can significantly lower monthly payments. Even if there is a balance transfer fee the money saved on total interest paid and stress relief from lower monthly payments often make it worthwhile.

Hidden Dangers

Unfortunately, an all too common occurrence when individuals refinance outstanding debt is to accumulate new debt and put themselves right back in the position they were before or make things worse. If a person was paying $200 a month on $10,000 of credit card debt which they'd just moved to a credit card where they now only pay $100 per month on that same loan sometimes they will think that they have extra $100 a month to spend. In reality they should use the extra $100 to pay off the loan faster.

The extra breathing room from lower interest and lower payments needs to be used to pay down existing debt faster not to incur new debt. It is also possible that moving credit card balances around in refinancing home mortgages too often can negatively impact a credit report. Refinancing should not be viewed as a game of always chasing the best terms and should be used to free up resources and pay off debt.


Refinancing is normally a win win scenario for all parties because banks will either continue to collect on existing loans if they negotiate a lower interest rate and new banks will attract additional customers by extending credit. Mortgage companies receive thousands of dollars in closing costs while homeowners save thousands of dollars in interest over the life of the mortgage due to the lower interest rate.

If used correctly refinancing can be a wonderful tool to help relieve stress and free up resources in cases of losing a job or going back to school and working part time. Lower payments and better loan terms can make a world of difference for many individuals and refinancing debt should always be one of the first steps to financial stability.