Refi is a slang or colloquial term for refinancing, and is used to describe a loan that refinances and changes the terms of an existing debt. People may seek a refi loan to refinance a home mortgage for one or more of several common reasons. Some use new loans to secure or lock in lower interest rates or to remove some equity owned in the home, which may then be used to pay off high interest debts, to meet other financial obligations, or to do things like invest in home improvements.
When a refi loan is obtained, it replaces the terms of the old loan. This means that interest charges may be different, monthly payments can change and length of time of the new loan is clearly defined. When interest rates go down, the principle object may be to lower monthly payments by paying less interest, but not everyone who gets a refi loan pays less per month.
Some people may actually pay more if they’re interested in removing equity from the home. Especially when housing values rise, people may find they own a greater amount of cash value in their homes. They may choose to cash out some of this value and raise their debt level, resulting in higher monthly payments. This comes with some risks if little equity is left in the home. If homes values drop, loans can go upside down, and the amount owed on the home can exceed its value.
Another reason for a refi loan is debt restructuring. If a lot of money is owed at high interest levels, like to credit cards, consumers may be interested in decreasing interest rates of these cards by paying them off. They attach the amount owed to a new loan, reducing their home equity, but this can help them to lower total monthly payment for debts.
Numerous qualifications exist in order to get a refi loan and chief among these is a good credit score. If interest rates drop and people merely want to lower payments, they still must have proven ability to pay on a new loan and a credit score that justifies a bank, mortgage company or other lender lending them the money. Since the crash of the housing market in 2007 in the US, it has become much harder for some individuals to obtain refinancing terms. Lenders are much more cautious and now many of them have stricter rules regarding who can qualify for refinancing. Those who have retained good credit may be lucky in this respect because they may be able to lock in lower interest rates, or change loans from variable to fixed rates.
It has been proposed that people who have fallen behind on mortgages should be able to renegotiate the terms of their mortgage and reduce overall money owed based on present home value. One idea is to give bankruptcy judges discretion to change terms of a loan and payment structure based on sinking home values. This would be a form of the refi loan, but it would also have some key differences because it might change the amount of money owed in addition to changing the loan’s terms.
