Business and Personal Finance Dictionary

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• REFINANCE
  
  If market interest rates drop below the rate you paid when you took a fixed-rate mortgage or other long-term loan, you may refinance the loan to take advantage of the lower rate. In most cases, you arrange for a new loan and pay off your existing loan. Or, you may refinance by coming to an agreement with your lender to change the amount of each payment or the payment schedule, especially if you find yourself unable to keep up with your payments. Unlike taking a new loan at a lower rate, which may save you money, changing the repayment arrangement is likely to cost you more in interest. On the other hand, it may be the best way to avoid defaulting on the loan. When a bond issuer refinances a bond because interest rates have dropped, the issuer floats a new bond issue and calls, or pays off, bonds that had been issued at higher rates. While the issuer faces certain transaction expenses, as you do when you pay off one mortgage and take a new one, there can be significant long-term savings in paying bondholders the lower rate.
  
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