The Disadvantages of Refinancing and Adding Interest
You take out a new loan for the purpose of paying off an existing loan when you refinance. A borrower generally refinances to obtain a better interest rate and lower monthly payment, but you can refinance to get money back in some cases, such as in a home or personal loan refinance. The amount of money you receive is the difference between the new loan and the balance due on the original loan, but your new loan may carry a higher interest rate.
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Qualification Process
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You must go through a qualification process to refinance an existing loan. Your income and assets must be documented and verified, and your credit history and score are evaluated by a loan officer. A borrower who previously qualified for a loan may not qualify when refinancing due to a change in credit status, income or lending criteria. You can go through the entire process only to be denied, or the interest rate you are offered may be significantly higher than you can afford.
Long Term Cost
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The long term cost of a refinanced loan rises when you add more interest. When you refinance to get a lower interest rate and do not take out additional money, you save money over the life of the loan. However, you could pay significantly more for the item or loan in total if you take out money when you refinance and have a higher interest rate.
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Longer and Higher Payments
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Your payments are extended, higher or both if you refinance with a higher interest rate. The additional amount in your payments goes toward the extra interest. Because you paid off the previous loan but took money out on the refinance, your payment schedule starts over. A 15-year loan you already paid on for 10 years but refinanced with additional interest will take more than just five years to pay off completely.
Loan Fees
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Loan origination and application fees are commonly associated with refinancing. You may have to pay the loan costs upfront or the lender will add the fees to your loan balance, resulting in more interest charged to you. Some loan fees are not refundable even if you are denied the refinance or offered less than desirable terms.
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