To refinance is pay off one or more old debts by getting a new loan from a new or existing lender. Refinancing is a common way for homeowners to take advantage of lowered interest rates or improved credit scores. It is sometimes an appropriate way to resolve financial problems, but often tends to make matters worse. As with any financial decision, it pays to do research and read the small print.
This article provides a general overview of what to do and what not to do when refinancing a loan. See FindLaw's Debt Negotiation and Settlement and Mortgage and Loan Basics sections for related articles and resources.
Do compare the cost of refinancing with the cost of your existing loans. Federal "Truth in Lending" laws require that lenders give you certain uniform disclosures containing the annual interest rate you are charged, the total finance charge, the amount financed, and other costs. You must consider all costs involved in refinancing to compare apples to apples when choosing a lender (not just interest rates).
Do refinance your higher interest rate unsecured loans with lower interest rate unsecured loans if the terms of the loans are comparable. Do be certain that the new rate that you will be paying will actually remain lower than your existing rate, and that it is not a "teaser" rate (one that will go up after an introductory period).
Do refinance your secured debts if the new loan is for the same length of time left on your old loan (or shorter), and the interest rate on the new loan is lower than the interest rate on your existing loan. The interest rate on the new loan usually must be substantially lower than the interest rate on the old loan to make up for costs and fees associated with the new loan.
Do consider refinancing your home to pay-off car loans or credit cards, but only if you are not in financial difficulty and not at risk of losing your home, and only if refinancing is beneficial from a tax standpoint.
Do watch out for refinancing scams. If you get unsolicited offers to consolidate all of your loans into one mortgage, to sell your home with an option to buy it back, or to save your home from foreclosure, beware! If an offer sounds too good to be true, it probably is.
Don't refinance your bank loan with a finance company to get a lower monthly payment. The interest rate with the finance company will almost always be higher than the bank loan, and will usually contain fees, insurance, and other costs.
Don't refinance your home for more than its market value. Lenders that offer loans exceeding your home's value charge much higher interest rates than standard mortgage lenders. In addition, you may not be able to deduct some of the interest that you are paying on such a loan. Even worse, you risk losing your home through foreclosure if you can't make the payments.
Don't refinance your home to pay-off unsecured debts, such as credit cards. Usually, unsecured creditors can't do all that much to collect the debt. If you refinance your home and fall behind on the mortgage, the lender can foreclose and you could lose your home.
Don't refinance an unsecured loan as a secured loan. If you do, you risk losing the property that you have pledged as collateral.
Don't refinance because of pressure from a debt collector. Because they really can't do much else, debt collectors try to intimidate you into refinancing so that they will get paid.
Before You Refinance, Weigh Your Options With an Attorney
If you have additional questions about refinancing or other debt-related matters you'll want to consult with a professional. A lawyer can clarify your rights and help you make the right choices to successfully resolve your debt problems. Contact a local debt relief or bankruptcy attorney to discuss your concerns and learn how they can help protect you and your property from unscrupulous debt collectors.