A mortgage one repays by taking out another mortgage. Refinancing a mortgage can allow one to secure a lower interest rate; for example, one can replace a mortgage at an 8.5% rate with one at 5.5%. In the case of a balloon loan, refinancing can repay the principal if one does not have sufficient funds to do so; that is, if one has made only interest payments over the life of the loan and has not saved the principal amount when the loan comes due, refinancing can prevent bankruptcy. There are two main drawbacks to refinancing. First, there is no certainty that one will be approved for it. One thus takes a risk every time one decides to make only interest payments on a mortgage. Secondly, refinancing generally resets the repayment period; that is, if one refinances six years into a 10 year mortgage, then one generally repays the new mortgage over 10 years instead of the remaining four.
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