If you are a homeowner with poor credit, your credit score will give you headaches when it comes time to refinance your mortgage. If you do your homwork and research mortgage lender before applying to refinance your mortgage you can save yourself a lot of trouble.
An important concept you will need to understand is loan to value ratio. This ratio represents the amount of your homes value that is mortgaged. You can calculate loan to value ratio by diving the balance of your mortgage loan by the appraised value of your home and multiplying by 100. For example if you owe $80,000 on a home worth $150,000 your loan to value ratio is 80,000/120,000 x 100 = 66%. The lower this ratio the better off you will be when refinancing your mortgage with poor credit.
If you are refinancing you mortgage with a low credit score, your mortgage lender may require you to pay “points” upfront as a condition to qualify. One “point” is one percent of the loan value paid at closing. This fee is considered prepaid interest and is not deducted from your loan balance. If you refinance your mortgage with a bad credit lender you could be charged as many as five points as a condition to qualifying. This is cash you will need to have on hand before you can close on the new mortgage. Some lenders will finance the points and include them in the loan amount along with closing costs; however, this is a much more expensive alternative to paying the costs up front.
The interest rates you can expect from a bad credit mortgage lender may be as much as three percent higher than loans offered by traditional mortgage lenders. The lender fees and closing costs are usually much higher so it pays to shop around and compare all aspects of the loan, not just the interest rate. Bad credit mortgages should only be used as a temporary solution; you can use this mortgage to rebuild your credit and refinance two or three years later with a better loan.
To learn more about your bad credit mortgage refinancing options, register for our free mortgage guidebook, “Five Things You Need to Know Before Refinancing Your Mortgage.”
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
