You know that the prime-lending rate, at the moment, is at a historical low. People are calling you everyday with outstanding refinancing options. Why shouldn’t you refinance? Refinancing means more money, right? Right. Sort of.
Refinancing to pay off revolving debt
If you are looking at refinancing to pay off revolving debt, refinancing is an excellent idea. If you have revolving debt that represents a significant percentage of your annual income, say 30% or more, refinancing can put you back in the “black” and help you build credit.
Revolving debt is a good thing when it is well managed. Sometimes, we get in over our heads. If you are easily making your mortgage and car payments, make a plan to have your revolving debt under control or paid off in X number of months or years. Assisted by the cash from refinancing, this credit card payment plan can work like a virtual debt consolidation on your part. It also builds good credit.
Refinancing to take on new debt
Ask yourself, am I refinancing so I can have more and live bigger? We’ve spoken before about “lifestyle inflation”—where you suddenly are making more money and spending that new money instead of saving—this is an easy thing to do when you have more cash in your pocket. Many people make the mistake of feeling suddenly too at ease with their finances, forgetting to save for a rainy day. This kind of spendthrift refinancing can lead you to spend more than your newly acquired capital, putting you further in debt.
Simply put, refinancing is good when you are intent on paying off debt. Refinancing is not often a good idea when it buys new debt. Be sure to evaluate your priorities before you refinance.