Do’s and Don’ts: Refinancing

California BankruptcyIn refinancing you pay off one or more of the debts by getting a new loan from the existing or a new lender. Refinancing generally works well for most debtors. However it can cause problems for certain debtors. If you are considering refinancing to deal with your debts, here are a few do’s and don’ts:

Do’s of Refinancing

–   Check the cost of the refinancing. Compare it with the costs associated with your existing loans. The Federal Truth in Lending Act requires the lenders to provide certain disclosures including the interest rate, the amount of credit and costs associated with the credit that will be charged to the borrower. Compare the entire cost and not just the interest rate.

–   When you are refinancing an unsecured loan, opt for one that has a lower interest rate than the existing loan. Many lenders offer a teaser rate to attract borrowers. The teaser rate increases over after the introductory period and often the borrower ends up paying more interest than what he or she would have paid on the original loan.

–   If you are refinancing your secured debts, you should ensure that the new loan is for the same period of time and the interest rate is lower than the existing loan. The new loan will have additional costs and fees. The interest rate on the new loan must be low enough to offset the additional costs and fees.

–   If you are not in much of a financial crisis, you can refinance your home and use the extra money to pay off your credit card debts or car loan. However you should speak to a tax expert to know whether you may incur any tax liability for such refinancing.

–   Beware of refinancing scams. If you find the offer too good to be true, then reject the offer. Most scammers will try to take advantage of your situation and will want you to act fast. They will try to tempt you saying that it is a limited period offer. Beware of offers to convert all your debts into a mortgage. You will end up losing your home.

Don’ts of Refinancing

–   Never refinance a bank loan with a loan from a finance company. The monthly payments may be lower but the interest rate will be generally higher and there will be additional fees and costs. As a result you will end up paying much more.

–   Never refinance your home for more than the market value of the home. If your lender is offering you more than the market value of your home, the interest rate will be much higher than the general rates. The risk of losing your home is very high in case of such refinancing.

–   Never refinance your home to repay unsecured debts. Remember unsecured debts are not backed by collateral. An unsecured creditor cannot take away any of your possessions if you default. However if you fail to repay the refinance loan on your home, you risk losing your home.

–   If you are thinking of refinancing an unsecured loan, your refinance loan should also be unsecured. If the refinance loan is a secured loan, you risk losing the collateral if your default.

–   Never refinance to get rid of a debt collector. A debt collector can only pressurize you but beyond that there isn’t much they can do, especially if the underlying debt is an unsecured debt.

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