How to Find a Bad Credit Refinance Loan for Your Home

by Gray Peters

If you’re looking for a bad credit refinance loan, there are two things we probably know about you. One, you’ve most likely kept up on your mortgage payments. Two, other debt obligations have been either neglected (meaning you’ve missed  a payment here and there), or ignored completely (meaning you gave up on trying to repay the debt – could have been a car repo or something along those lines). Now you’d like to refinance, and who knows why. Could be a variety of reasons that you want to refinance your home loan even though you have bad credit. Here are a few I can think of:

1. You want to get some of the equity out of the house to pay off some bad debts.

2. You’re just trying to take advantage of low rates and get your monthly payment down.

3. You’ve realized you’re not going to have much luck selling your home, so you’re thinking about improving and/or adding onto it.

Whatever the reason you’re trying to refi your house, you better go in with your eyes wide open, because when you start the refinance process – especially with bad credit – you’re basically starting the mortgage qualification process over again from scratch.

You need to have a few things in place before you even think about a refi.

First of all, do you really have enough equity to keep your ratios inline? You’re going to need to have 20% equity left over – after you complete the refinance process. If your home is worth $250,000, and you want to borrow $20,000 to fix up the house, then your current indebtedness can’t be more than about $175,000. I know those numbers don’t quite add up; more on that in a minute.

Second, your debt to income ratio can’t go up to much with the new loan (obviously this only applies if you’re trying to borrow money out of the house to fix it up or pay off other debt). If you’re borrowing the money just to fix up the house, you’re probably looking at about $6-$9 added onto your monthly payment per $1,000 borrowed. Let’s say it’s $9.  A $20,000 loan will increase your monthly payment by $180, give or take. Take that into consideration.

On the other hand, pulling out some cash to pay off credit card debt could improve your debt to income ratio. Your credit card payment usually comes in at about $25 per $1,000 borrowed, so trading that in for $9 per $1,000 borrowed would help a lot. Not to mention the fact that sometimes the interest on that new mortgage debt will be tax deductible, whereas credit card debt is never going to be.

If you happen to be refinancing just to lower your payment, make sure you fully understand the costs associated with the refi, because it will take at least a few years at the new lower payment to recoup the cost of refinancing with bad credit. Let’s say your new mortgage is $150 lower, and the total closing costs on the house were $5,000 (I think that’s pretty conservative). It would take you almost three years before you realize the benefit of the refi. If you think about the fact that lowering your interest rate hurts your tax deductions, it actually takes you longer to really enjoy the benefits of refinancing your house.

Keep all these issues in mind if you have bad credit and want to refinance your home loan. There are a lot of ways it can benefit you, but if you don’t factor in all the real costs, you might not be getting ahead at all.

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