Refinancing: Upgrading from a Subprime Mortgage

By Francine L. Huff
Mortgage Credit Problems Columnist

If you took out a subprime mortgage in the last few years, that loan may have outlived its usefulness. You were able to buy your home, and hopefully you now have a history of on-time mortgage payments. Depending upon your situation, you may be able to refinance the mortgage to get more favorable terms.

Should You Refinance?

Talk with your current lender before deciding to refinance your mortgage, especially if you are having trouble making your current payment. Many lenders have agreed to work with their existing customers to get mortgage payments under control rather than start the foreclosure process. If your lender won't work with you and you still think refinancing is the best option, here are several things to consider:

Is your subprime mortgage about to reset? If so, can you handle the new payments?
What is your current income-to-debt ratio? Lenders want to know that you have enough income to make payments if you refinance.
If you refinance with your current lender will you have to pay closing costs?
Are you planning to sell your home soon? If so, it may not be worth it to pay for a refinance if you can continue to make monthly payments until you're able to sell.

Good Credit Will Help

The better your credit, the more likely you'll be able to refinance your subprime mortgage. If you want to cash out some of your equity, you'll need a much-improved credit score. But keep in mind that cashing out equity can result in a higher interest rate. If your equity equals less than 20%, you'll be required to get mortgage insurance (MI) or pay a higher rate when you refinance.

Bad Credit Refinancing May Be Difficult

If you've fallen behind on mortgage payments or other bills, you may already have bad credit and be considered a risk by lenders. As a result, you may have a difficult time refinancing your mortgage, and in this tough lending environment may be denied a loan altogether. So what should you do if you're desperate to refinance your subprime mortgage but can't get approved?

Keep making payments on your mortgage on time.
Find a reputable mortgage lender that will refinance your subprime mortgage. Use the signup form to get help.
Investigate the FHASecure program, which helps people who've missed payments refinance adjustable rate subprime mortgages and avoid foreclosure.

The decision to refinance depends on whether your credit and equity position has improved since you took out your original loan. If so, refinancing may get you better mortgage terms and save you money. If you are unable to continue making mortgage payments, and your lender is willing, restructuring your loan may be an alternative to foreclosure. Your plans for the property and the presence or absence of prepayment penalties also drive your decision to refinance or keep your old loan.

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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