Mortgage rates are at historic lows and it seems like everyone's jumping on the refinance bandwagon these days. But is it really a good idea for people with bad credit? If your credit was better when you took out the original loan and it helped you qualify for a low rate, refinancing when your credit is worse makes little sense. If your credit is better now, but still not great, you should analyze how much you could really save by refinancing now as opposed to waiting until you have time to improve your credit even more.
If your credit is at about the same level now as it was originally, trends in the market will have more to do with how much you can or cannot save by refinancing your home.
Of course there are other considerations, such as whether your current home loan requires you to pay mortgage insurance that refinancing could alleviate; the type of loan you have; an introductory "pre-pay" period that may be about to expire; and additional factors that a loan officer or financial planner can explain.
Once you decide that refinancing makes sense for you, you have two options: try to repair your credit before applying for a loan, or apply for a loan right away without attempting any credit improvements. If you would like to try to repair your credit first, be prepared to spend some money and some time paying down your debts.
If you decide to repair your credit on your own, you'll want to be careful about making payments on collections accounts that you haven't paid on in a few years, in order to avoid bringing them to the forefront of your credit. Your best bet with credit cards is to pay them all down (but not entirely off), and not to close any of them. Paying off an account sends a message to the credit reporting agency that you're not comfortable carrying a balance, and cancelling a credit card sends an even clearer message that you believe yourself to be in trouble with credit.
Going about repairing your credit score yourself can be tricky. You may want to enlist the help of a financial planner, a loan officer who offers credit advice, or even a credit counseling agency. These professionals can guide you through the credit repair process and help you maximize the score you receive for the amount of money you're able to spend.
If you choose to apply for the loan right away, you'll have to consult with what is known as a non-prime lender. These lenders specialize in working with people who have bruised credit. The programs they offer are less stringent in their requirements for approval of the loan.
You'll pay more in interest for a non-prime loan to offset the implied chance the lender is taking in working with someone who's had credit trouble in the past, but the advantage is being able to apply and be approved for your loan without spending time and money raising your credit score. These loans are far more difficult to obtain than they have been in the past, but your best option is to check with a lender-matching service, like Bills.com.
You must make all these decisions based on how much you can save by acting now or waiting until later. Refinancing with a low credit score is not anyone's first choice, but it may make sense for you if other factors would cost you even more before you have time to bring your credit score up. A financial planner or loan officer can advise you, but the final decision must be yours.
To get a free refinance quote log on to www.bills.com. Copyright ©, ARAnet, Inc.
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