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Bad Credit Mortgage Loans: Refinancing Can Help Manage Debt

By Karen Lawson
Mortgage Credit Problems Columnist

A major key to qualifying for mortgage financing is home equity. If you have enough home equity, you may be able to refinance your mortgage for enough to pay off consumer debt or to repay past due mortgage payments. Qualifying for refinancing generally depends on your credit standing, income, and home equity. Here are some ways refinancing can help you improve a tough financial situation.

Avoiding Bad Credit with Refinancing

Bills and more bills: If yours are growing like weeds, then it's time to get your debt situation under control. If you owe significant amounts on credit cards and other consumer loans, you may be able to refinance for enough to pay off your debts. Your potential savings depends on several factors, which include:
  • How long you plan to keep your home
  • The amounts and APRs on your consumer accounts
  • The cost of refinancing including lender and vendor charges
  • Current mortgage amount and APR, and whether or not you can lower it by refinancing
  • Your credit score (lenders charge higher fees as their perceived risk increases)
If you plan to keep your home only a few more years, you may be able to use an adjustable rate mortgage with a low initial rate for a few years. Be careful to avoid prepayment penalties, as these can reduce potential savings if you refinance or sell your home and pay off the mortgage sooner than the date specified in your mortgage documents.

Home Equity and Your Debt

Homeowners frequently fall back on home equity to resolve money problems, but this can work only to the extent you're willing to risk losing all or part of your home equity. Home equity is a cushion against falling property values. If you borrow against your equity and your home's value decreases, you could end up owing more in mortgage debt than your home is worth. If you're considering refinancing for debt consolidation, understanding why you got into trouble with debt and how you'll manage debt in the future is important. Otherwise, if you incur more consumer debt after refinancing, you could owe more than you did before refinancing!

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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