Bad credit mortgage refinancing is used to solve mainly two types of problems.
Case 1
If you are a homeowner and have bad credit, a credit or debit card with very high rate of interest and a house that is with considerable equity, you may refinance your house in order to pay off the debt accumulated through the credit card and take out the entire or a portion of your equity. The amount from equity can be used to pay the obligations with higher interests. Though, the bad credit mortgaging refinancing rate of interest is high when compared to the conventional loan, the payment on the house must be lesser than the entire consumer debt with higher interest.
In bad credit mortgage refinancing, you may intend to utilize the cash from the equity of the home for paying off the bills. This is known as debt consolidation loan. If the value of your house that is used for refinancing has risen, the appraised worth of your home can be used for paying off the larger loan. So, the amount in the new loan should be high enough to paying off the closing costs of the loan and should still have something left over for paying off the debt of the credit card.
Such bad credit mortgage refinancing has lot of advantages. You get a longer term to pay off such loans. You will be paying lower interest rates than the payments of consumer debts and old home payment, as you can get lower rate of interest on sub-prime loan. However, you should be aware that refinancing in this way has a lot of risks. If you haven’t modified your ways which had led to the high credit card bills in the first place, you may end up with bigger debts. As you have already used the equity on your house, you would be left with only one alternative, i.e. foreclosure or bankruptcy.
If you opt for debt consolidation loan method of bad credit mortgage financing, then you should use the amount for paying off the accrued debts. You should even consider credit counseling so that you can avoid getting back to poor credit practices.
Case 2
When purchasing your home, if you had bad credit, you would have taken a sub-prime mortgage loan with higher rate of interest to complete the purchase. Let’s say that more than two years have passed since you took the loan, assuming that you have settled all the loans and have not incurred bad credit. Then, it is time for you to refinance the loan so that you can get a better rate of interest.
You would be shocked to know that in spite of great credit history for two continuous years, you may not be eligible for a conventional loan with low interest, when you try to refinance the bad credit mortgage. Two main factors decide the kind of loan you would receive, besides other factors -
1. Your current income
2. Your debt amount
Now, just evaluate whether the following statements are true in your case -
1. If you get new loan, the rate of interest will be two plus percentage points less than the existing loan.
2. You are planning to stay in your house for another 3 years or more
Under these conditions, refinancing a bad credit mortgage could be a good idea.
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