Credit issues There are two different things that mortgage refinancing loans are used for.
The homeowner has bad credit, a lot of high-interest credit card debt, and a lot of equity in his or her home. The person refinances his or her home and cashes out all or part of the equity to pay off the high-interest bills. The high interest debts are paid off with the money from the equity. Even if the interest rate on the bad credit mortgage refinancing loan is higher than that of a regular loan, the house payment should still be less than the total of the high interest consumer debt.
A debt consolidation loan is a type of bad-credit mortgage refinancing in which the owner plans to use the cash from the home's equity to pay off bills. The appraised value of the home being refinanced must have gone up so that a bigger loan can be given. The new loan amount must be high enough so that the owner can cover the closing costs and still have enough money left over to pay off the credit card debt.
This kind of mortgage refinancing for people with bad credit can be good in many ways. The loan will be for a longer time. Since even high-interest subprime loans have lower interest rates than high-interest credit cards, the payment on the new house will be less than the sum of the payments on the old house and the consumer debt. But there are risks if you choose to refinance in this way. If the homeowner doesn't stop doing the things that led to the high debt, they may end up with even more high-interest credit card bills. Since the homeowner's equity has already been "cashed out," bankruptcy or foreclosure may be the only options if money is tight.
If a homeowner with bad credit chooses a debt consolidation loan as a way to get a mortgage, they must use the money they get to pay off their other debts. Consider getting credit counselling to keep from going back to bad credit habits.
The homeowner had bad credit when he or she first bought the house, so he or she had to get a subprime mortgage loan with high interest. Since the loan was made, at least two years have gone by, and the homeowner has made all of the payments on time and hasn't gotten any other bad credit. Now is the time to get a better interest rate by refinancing the loan.
Even if a person has had good credit for two years, they may not be able to get a low-interest conventional loan to refinance a bad credit mortgage. The type of loan that can be gotten depends on a lot of things, like the homeowner's current income and how much debt they have.
If the following two statements are true, refinancing a mortgage with bad credit may be a good idea.
The interest rate on the new loan will be two or more percentage points less than the rate on the old loan.
The owner wants to live there for at least three years.