Poor Credit Home Loan Refinancing: It Can Make Life Easier while I Fix My Credit?

By Karen Lawson
Mortgage Credit Problems Columnist

If you have bad credit, it can be difficult to pay bills and meet emergencies, leaving you overwhelmed. But if you are already a homeowner and have enough home equity, you may qualify for cash-out refinancing or a home equity line of credit (HELOC).

Homeowners with Bad Credit May Qualify for Mortgage Loans

Home equity may provide help for homeowners with bad credit. Mortgage loans, unlike unsecured credit such as credit card accounts, are backed by your home. Home equity is the difference between what you owe on your home and what your home is currently worth. If you have enough equity, you may qualify to refinance your current mortgage or take out a home equity line of credit for paying debts and other expenses.

Bad credit mortgage loans may offer lower finance charges than unsecured credit: If you're paying double-digit interest rates on credit card balances, plus extra fees, it can take decades to pay off credit card debt. And late payments can make a bad credit score even worse! A bad credit mortgage loan can consolidate several payments into one, eliminate late fees, over limit fees, and annual membership fees often charged for credit card accounts.

A home equity line of credit, or HELOC, can provide cash for emergencies: If you fall ill, or lose your job, home equity funds might be the solution to put cash in your hands to help you pay your bills. Or if you're starting a family, you may want to ensure lower payments to help accommodate childcare expenses. If you have bad credit and find out that you qualify for home equity financing, keep in mind that you should use it only for paying off other bills or taking care of unplanned expenses; otherwise you risk increasing your debt and making things worse in the long term.

Making payments on a bad credit mortgage loan can help rebuild credit: If your credit went south after you bought your home, consolidating debt with refinancing or a home equity line of credit can help you lower or eliminate credit card balances. This can help increase your credit score provided you make your mortgage payments on time. A good track record of paying off your bad credit mortgage loans regularly on a regular basis (either refinancing or home equity financing) can assist in rebuilding credit while streamlining payments. If you have the same credit score or better than when you received your loan, refinancing now may actually lower your interest rate!

Bad credit mortgage loans can provide a "clean slate:" Once you've transferred your debt to a bad credit mortgage loan through refinancing or a HELOC, you can concentrate on making your mortgage payments on time (or ahead of time) and rebuilding your credit score.

There are many other variables, such as interest rate, that will depend on your personal situation. Getting advice from a financial services professional is important, as is comparing several different loan offers to help you decide which bad credit mortgage loan can best meet your needs. To begin, start your research and compare rates and competing loan offers that are available to you, and find the the best lenders.

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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