Refinancing Risks

Refinancing may seem like a great solution to relieving some of the stress of your monthly payments and high interest rates. In many cases this is exactly the case.

For those who wish to free up some of their income after working hard to repair their credit, it is an ideal situation. Unfortunately, there are risks as well that you should be aware of.

The fresh start you are looking for can quickly become a nightmare and you may find yourself right back where you started or in an even worse position. 

Refinancing basically works by taking a current installment loan, mortgage or revolving credit line and resetting it at a lower interest rate. Because it is a brand new loan the previous lending vendor is paid in full and new payment arrangement is formed.

The refinancing is likely at a lower interest rate and can often be adjusted in the time frame that you have to pay off this new loan. This all works as a benefit to the client who will now have more accessible income available to them. 

However the risk comes with the responsibility of the client. That new accessible income can be a great opportunity to make larger debt payments, put away some savings or catch up on bills.

Unfortunately, often the new income can start overspending habits, the same habits that likely caused the debt. A cycle of short income, applying for more credit and then debt mismanagement can re-establish and undo your hard work of repairing your credit.  

It is even more risky if you have refinanced any revolving credit with your mortgage or installment loan in an effort to consolidate the balances.

Credit cards and lines of credit are good if managed. If mismanaged they can to hurt your score. In the case of a refinancing loan you are left with a new loan at a lower interest rate but also a credit card or cards with an empty balance.

Should you start spending on that card again you are in turn paying the balance off twice. Once through your new loan and again to the credit card company.  

All in all refinancing is a fantastic option if it is managed correctly. It can improve your credit score with your consistent prompt payments and free up your income.

The benefits to lowering interest rates, especially on a mortgage, can be noticed immediately. Your monthly payments could drop in the hundreds and your overall savings over the course of the loans lifetime could be in the thousands. The risk only comes from over spending and renewing poor debt management habits.  

As with anything, managing yourself properly will keep you from becoming bogged down in debt. Refinancing can offer a lifeline to you, but you need to be careful because mismanagement, as has been mentioned here, can create many more problems than you can deal with. Refinancing is a double-edged sword, so be careful with it.