Welcome back!
To explain refinancing, think of it this way. Right now, you hold the title to your home, but you have given that title to a mortgage lender as security for some money the lender has lent to you. You don’t have that money in your bank account, of course, because you gave it to the person you bought the house from in the first place.
So, here we are. The bank has your title deed, and you have a debt, a mortgage.
Each month, you are making payments on this mortgage. Most of the payment will be interest, and a small amount will be a repayment of some of the original loan. We can’t really explain refinancing until we explain about interest.
Why do we have interest?
Well, you see, the bank could be doing something else with that money, if you hadn’t given it to someone in exchange for a house. The bank could have bought shares, or bonds, or bought a house itself and collected rent from the tenant. That money would be earning money for the bank, if the bank still had it.
Since you have this money now, or at least you did have it, for a split second before you handed it over to the vendor in exchange for your house, you need to compensate the bank. If the bank can make more money by lending the money to you, then the bank is very happy to do that.
The bank sets your monthly payment high enough to cover the interest, plus a very small amount extra. The extra goes toward reducing your loan principal - the amount you still owe.
Over the years, all those little amounts will have reduced your loan principal. It may also be that interest rates have fallen in those years.
If you started over today, with a smaller principal amount and a lower rate of interest, then your monthly payment would be lower. your bank won’t volunteer to do this, of course, because they want to keep collecting the higher rates from you. You can’t count on your bank to explain refinancing to you - on the contrary, they hope you never figure it out!
In one sense, it is easy to explain refinancing, because in principle refinancing is a simple concept. In practice, of course, there are many, many variations and complications, and refinancing has its perils. You need to get good advice and consider your own circumstances before making a decision about refinancing your home.