Refinancing Do's and Don'ts
To refinance is to 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 improve their credit scores. It is sometimes an appropriate way to resolve financial problems but can often 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. As borrowers, you need to 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 debt (for tax purposes), 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.
Does Refinancing a Mortgage Hurt Your Credit Score?
Refinancing your mortgage can affect your credit score in a number of ways. These include:
- Multiple credit checks may lower your credit score. Before approving your loan and giving you new credit, banks and other financial institutions will pull your credit report to get your credit history. This may cause your credit score to drop temporarily.
- When you refinance a loan, you will close your old loan. That may lower your credit because you closed a long-standing credit account.
Even though your credit score may take a hit when you refinance, it should improve with time because of your strong payment history. But make sure to make repayments on time.
Is It Better To Refinance With Your Current Lender?
There is no law that says you have to refinance with your current lender. Sometimes it may be beneficial to do so; other times it is better to go with a different one. When choosing a lender you should generally take into account the following:
- The time it takes to get a new loan
- The interest rate on the loan
- How much the upfront and ongoing fees are
Can You Negotiate Refinance Rates?
Yes, you can negotiate your refinance rates. Lenders will initially give you an offer, but most offers can be negotiated. There may be some fees that are non-negotiable, but most fees can be changed by negotiation.
Considering Refinancing? Speak to an Attorney
Refinancing transactions can be complicated and time-consuming. And although you can get the mortgage lender to assist you, they will not represent your interests. So, it may be best to speak to a lawyer if you are thinking of refinancing or have questions regarding the process.