Posted in Finance, Accounting and Economics Terms, Total Reads: 457
Definition: Refi Bubble
Borrowers, in order to make advantage of lower interest rates, replace their old debts with new debt obligations during this period. A typical example is when homeowners refinance their home mortgages to make advantage of the lower interest rates. There is usually a certain amount of fee levied for such cases and hence, if the amount is small, one should actually consider whether the decrease in interest to be paid is good enough to pay the fee and still be left with a certain amount of profit.
During the sub-prime crisis, most people were provided loans for their even though they were not eligible for it. And most of them took mortgages on their home. As long as the rates were good, all was well. Once the interest rates started rising, people were not able to repay the money. Also simultaneously, the value of the property started depreciating. Both these together contributed to the sub-prime crisis. This is thus called the refi bubble.