Refinancing is when a business or person revises a mortgage payment schedule for repaying a debt. Refinancing is a tool typically used to replace an older loan with a new loan offering better terms or interest rates.
The risk that an early unscheduled repayment of principal on mortgage-backed securities(MBS) will occur when the underlying mortgages are refinanced by borrowers. All MBS buyers assume some level of prepayments in their initial yield calculations, but an increase in the level of refinancing (which usually occurs as a result of falling interest rates) means that MBSs mature faster and will have to be reinvested at lower rates. For a mortgage borrower, the risk is that he or she will not be able to refinance an existing mortgage at a future date under favorable terms."