Bad Credit and Home Refinance

Can you refinance your home with bad credit? Yes, you certainly can. The key is to be certain that your financial situation and the refinance loan package offered make refinancing a good move. The following information will help you evaluate if a home refinance, when you have bad credit, is for you.

How Refinancing Works

Refinancing means taking out a new loan on your home to pay off your original mortgage.  You substitute the terms of the mortgage with new terms. People refinance in times of falling interest rates so they can get a lower monthly payment. Refinancing is also a normal step if you have an Adjustable Rate Mortgage, or ARM, with a low initial rate that rises at a specified time. Finally, many mortgages have large balloon payments at the end of relatively short loan period, five, 10 and 15 years is typical. A refinance lets the borrower benefit from lower initial monthly payments and avoid the balloon payment by rolling it into a new loan.

Making It Work for You

Just because you can get a home refinance loan with bad credit, it doesn’t necessarily mean that you should. In each of the above examples, the goal of a home refinance is to lower or maintain low monthly payments. Typically, this is done by having a lower interest rate on the new loan.

The rate can be lower because rates have fallen in general or because you are in better financial position and so qualify for a lower rate from the lender.

Interest rates increase with risk for every lender. If you have bad credit, the lender will view you as a high-risk borrower and charge a higher interest rate on your mortgage. You must evaluate if getting the home refinance loan at a higher rate makes sense for you.  For example, a refinance can make sense if you have an ARM loan of 7.00%, but the ARM change is due and the rate will increase to 9.00% the following month.  The lender offers you a rate 7.50%, but standard rates are 6.00%.  Your credit is driving the rate up, but a refinance in this case will benefit you because the rate increase will be significantly higher. 

Watch the Fees

Similar to interest rate practices, are the fees.  Every loan has fees. In some scenarios, the cost of closing the loan wipes out your interest rate saving benefits for a period of months or years.  Additionally, if you plan to sell your home before you have recouped the refinance costs, you may not be able to benefit from the refinance.  For bad credit borrowers, there can be additional fees. For instance, a lender might charge an upfront fee to allow you to apply because the chance of your being turned down is higher. If the savings are there for you in the form of lower monthly payments, it can make sense. But the bad credit borrower needs to read the fine print on fees on any home refinance loan.

Finding Your Lender

Many lenders specialize in subprime mortgages, but most large banks and mortgage companies will have subprime specialists on staff as well.  It’s best to work with a lender you trust because you will get your best rate from people who know you and understand your personal financial situation. Choose a lender that offers a wide array of mortgages, not just subprime mortgages because you may qualify for another type of mortgage with reduced costs.  Some lenders offer credit repair loans that offer you rate reductions after paying your mortgage on time for 12 to 24 months. 

Watch Out for Scams

Some lenders will take advantage of bad credit borrowers because the borrower’s options are limited. Watch out for excessively high fees or high interest rates.  Be certain that the terms to which you agreed are in the document you sign.