The payoff and replacement of an existing loan with a new loan, typically under different terms. Refinancing differs from debt restructuring, which is the modification of an existing loan. There are several reasons an investor may consider refinancing an existing loan including: 1) to improve on the loan’s interest rate; 2) to extend the loan’s maturity date; 3) to change the interest rate from variable to fixed, or vice versa; or 4) to access embedded equity by increasing the loan amount. Reasons 1 through 3 above are often referred to as “rate-and-term refinance” while reason 4 may be referred to as a “cash-out refinance.”
The ability of an investor to refinance a loan is dependant on a variety of factors including general market conditions, the availability of financing, the borrower's credit worthiness, and the value of the underlying property. Note however, that an investor may be constrained from refinancing a loan due to lockout provisions or prepayment penalties. Additionally, there may be costs associated with refinancing that may make it a less attractive option.