If you find yourself facing unmanageable debts, a refinance loan may be your way out. While having debts hanging over your head isn’t any fun, bad credit doesn’t have to hurt your chances of landing a decent refinance rate. Choosing the right loan can get you the cash you need and give your credit score a much-needed boost. How much it will actually cost you to refinance your mortgage loan will depend on just how low your credit score is.
Items you will need
- Credit report
Make sure you know as much about what’s in your credit file as a lender does. You can get a free copy of your Experian, Equifax and TransUnion credit reports once each year. If your credit score is below 660, you're on shaky ground but you may still find a lender willing to give you a loan. The bad news is, prepare to pay a whole lot more for it. Ask yourself whether refinancing your mortgage is really going to help you out financially.
Talk to several lenders, including your current lender, about your financial situation. Find out if you will actually save money by refinancing your mortgage loan. A huge benefit of refinancing is getting a lower interest rate, but only people with good credit qualify for the lowest rates. Contact half dozen or more lenders until you find one who offers you terms that you can handle. Even if your credit score is low, underwriting guidelines differ. Avoid getting discouraged. If one lender rejects your loan application, another may approve you for a loan.
Ask a lender how much extending the term of your mortgage will lower your monthly payment. Even though you may save money now, think about how much extra you will be paying in interest by stretching out the length of the loan.
Get the details about a cash-out refinance loan. This may be an option if you have home equity you can use to your advantage. Cash-out refinancing can give you the money you need to pay off high-interest debts, which will help improve your credit score. Unlike taking out a separate home equity loan, a cash-out refinance replaces your current mortgage with a new mortgage. Negotiate closing costs with the lender to bring down the cost of the loan.
Meet with a sub-prime lender who specializes in writing loans for people with bad credit. Since you’re a higher risk, expect to pay a higher interest rate. That means paying the lender more money over the lifetime of the loan. Sub-prime loans usually come with prepayment penalties and other extra fees. The up side is you can improve your credit score by making your loan payments on time.
Look into an Federal Housing Administration refinance loan. As long as you qualify, this option can save you money. In order to qualify, you must be living in the home you want to refinance. Payments on your existing mortgage must be current. Another requirement qualifying you for FHA refinance is that the loan must lower your monthly principal and interest payments.
Work on raising your credit score before applying for a refinance loan. This will take a while but may get you a better loan deal in the end. Pay up all past due accounts and pay down your credit card balances. Even if you’ve been late paying bills in the past, now is the time to stay current by paying all your bills on time. According to the Fair Isaac Corporation, old credit problems eventually fade into the past, increasing your credit score over time.
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