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2 ways refinancing can help your finances

By Michele Lerner
Mortgage Credit Problems Columnist


While homeowners who need bad credit mortgage refinancing may not qualify for the best rates, they may find that interest rates for a poor credit mortgage are still typically far lower than the rates charged on credit card debt.

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While good credit makes it easier to qualify for a mortgage refinance, homeowners with substantial equity in their homes may be approved for bad credit mortgage refinancing. Equity is key in this situation, since borrowers with less than 20 percent equity will need to buy mortgage insurance (MI). MI companies often have even higher standards for borrowers than lenders, so homeowners with a low credit score or a high debt-to-income ratio may not qualify.

If you can get a refinance, here are two ways to use that option to pay down your debts.

  1. Take out cash to pay off debt. Known as a "cash-out" refinancing, this type of mortgage refinance requires homeowners to have significant equity, especially if they have bad credit. In this case, the borrowers refinance their mortgage and borrow against additional equity in their home, using the extra cash to pay off high-interest debt such as credit card balances. In addition to being difficult to qualify for, a cash-out refinance has a couple of other negative aspects. First, homeowners are stretching out payments on their debts for 15 to 30 years, which means that the total interest paid on the debt will be significant, even though the interest rate is likely to be lower. Second, homeowners who lack financial discipline may be tempted to use credit cards again once they are wiped clean by the new mortgage.
  2. Lower monthly mortgage payments. Homeowners without enough equity to qualify for a cash-out refinance can still use a home refinance for debt relief. If you qualify for a mortgage refinance at a lower interest rate, your monthly mortgage payments drop. You can then use the extra cash to pay down other high interest debt faster.

If either of these refinance strategies will help you get rid of high-interest debt, you can complete the form on MortgageCreditProblems.com to get in touch with lenders and see if you qualify for bad credit mortgage refinancing.

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