Many people take loans to build houses. Taking a loan for building or acquiring an asset is a common act but taking a loan for paying a previous loan seems unusual. Creating new debt to pay off previous debts may seem absurd at the first place but if analyzed and used judiciously can turn out to be quite useful. This process of repaying earlier loans by taking another loan from a different lender or may be the same lender is known as Refinancing.
Whenever a person intends to take a loan, he compares the interest rates charged by different lenders and then selects the one offering him loan at the lowest interest rate. This is done so that he gets the best deal and saves money. It is the same purpose for which refinancing is used. It helps in saving some money which would otherwise have been spent in paying higher interest on a previous loan.
Simply stating, in refinancing a person is taking a loan from a bank to pay up in full an old loan he might have taken earlier. After refinancing, the EMI of the old loan would stop and the EMI for the new loan will start.
The new loan which is taken for refinancing the old one is usually at a lower interest rate than the previous one.
The mode of interest rate (fixed or floating) chosen for the refinance loan is entirely the choice of the borrower. It has no link with the mode of interest chosen for the original loan. If a person had taken a home loan at fixed interest rate it does not mean that he has to take the refinance loan also at fixed interest rate. He is free to make a choice.