In lending, the terms refinance and renewal sound interchangeable, but are actually two distinct processes. A renewal simply involves extending the maturity of a loan without changing any other terms. A refinance is a longer, more involved process that replaces an existing loan with an entirely new one. Each is applicable to its own individual situations.
Renewals apply to open-ended loans. The loans are typically short-term, between one and two years, and interest-only. Types of loans that are renewable include lines of credit, time notes, construction loans and letters of credit. The account number typically doesn't change, nor do any of the loan terms such as credit limit or interest rate. The only aspect that changes is the maturity date. Typically renewals occur in like intervals. This means a one-year line of credit will renew for an additional one-year term. This is commensurate with the lender's loan policy.
A refinance involves a take-out of an existing loan. Essentially, a new loan replaces an old one. The terms can be the same, similar or completely different. Loans that are refinanced are typically closed-end, amortizing loans. These loans include fixed and adjustable rate residential or commercial mortgages, fixed or variable rate term loans and vehicle loans.
The bank contacts the borrower when a loan is due to mature. It informs the borrower that he has the option to pay off the entire loan balance, or provide updated financial information so that the loan can be reviewed for renewal. The borrower submits the financials to the bank who assigns the loan to the underwriter. If there has been no material deterioration in the borrower's financial condition, the bank will have him sign an extension agreement, extending the maturity date for a like term. Occasionally, the bank will write an auto-renewal close into the original note. This means the loan will automatically extend at maturity, unless the borrower opts against renewal or the loan goes into default.
A borrower applies for an entirely new loan at either the same lender or an entirely new one. He fills out an application and provides all required financial and supporting information as if he were applying for a new loan. If approved, he will obtain a payoff figure from his existing lender. He will set a closing date and sign all appropriate loan documents. Once the closing has occurred, the new bank will pay off the existing loan. The original lender will cancel any security documents such as a mortgage, UCC or assignment of leases and rents, while the new lender will file its own.