If you’re like many Americans, you’re looking at a double whammy in real estate. Your home loan is increasing in rates now that interest rates and starting to rise, and your job (if you still have one) is paying the same or less than it was when you took out the loan in the first place.
Refinancing with Bad Credit
Real estate is a tricky animal, and while it can give you substantial headaches with adjustable rate mortgages and real estate bubbles, your home can also be your salvation if you’re looking to get out from under a bad financial spot.
In a perfect world, you decide to refinance your home while the market is at its peak. You have excellent credit because you’ve been paying all of your bills on time thanks to the terrific job you’ve enjoyed for the last decade or so. Of course, in our current economic situation, more people than ever are unemployed, the housing market is rocky in many parts of the country, and the banks are tightening up the terms on refinancing and new loans. This doesn’t have to spell doom though.
If you’ve wound up with less than stellar credit, it’s still very possible to refinance your current home or auto loan. When you refinance with bad credit, you’ll be working to get a new fixed interest rate on your loan that saves you money in both the short and long-term. The most likely candidate for a refinance is anyone suffering under an interest-only or an adjustable rate mortgage that is getting ready to adjust to a new, higher rate.
Unfortunately, many people with these sorts of loans are the individuals who didn’t have great credit to begin with. These sub-prime borrowers were given mortgage loans with unusual terms to be sure they could get into a house during the housing boom a few years ago. Now those super-low interest rates that made it possible for under qualified buyers to get a home are making it a challenge for them to keep the home. You can beat this, though.
Your Guide to Refinancing with Bad Credit
Your credit may not be so hot, and you’ll likely have to work harder, but you can get a new loan on your mortgage to reduce your monthly payments. There are two major benefits for refinancing, especially if you have bad credit.
Cash Out Refinance
In most cases you need to have equity in your home in order to refinance. The payments you’ve been making and the rising price on your home as you’ve lived there combine to bring you that equity. When you refinance your home, you have the option of doing a cash-out refinance. In a cash-out refinance, you’re able to pull that equity out of your home in a sort of loan program.
Once you’ve pulled out the equity, the funds are yours to do with as you please, although you need to be very careful to not waste the money. When you do a cash out refinance with bad credit, the funds should be used to clear up the mess you have with your bills. Pay off your credit cards, car loans and any store charge cards you may have.
Put some of the money into savings so that you’re sure you always have money on hand to pay your bills on time going forward. Make a smart investment in your home so that your home equity improves even more – earning you back a lot of that money you’ve borrowed in additional home value.
The other tremendous benefit of refinancing your home with bad credit is the significant reduction in your interest rate. When you refinance, you’ll be able to reduce your interest rate, which reduces your monthly payment. If you have a rising interest rate on your loan, thanks to an adjustable rate loan, a refinance can save you hundreds of dollars a month. Even if you have a fixed rate loan, the low interest rates offered by banks now can still save you hundreds of dollars per month.
Again, having that extra money on hand each month gives you the funds you need to get back on your feet by paying down old debt and allowing you more money every month for household expenses – a very welcome addition if your job situation has changed and cash flow isn’t as plentiful as it was before the economic downturn.
The biggest hurdle you’ll find when you decide to refinance with bad credit is the lack of banks available that are willing to take a risk. Banks were stung with the dramatic slump in the real estate market, and they have now tightened up standards for lending on things like refinancing. This doesn’t mean you can’t get a loan, but it does mean it might be a bit trickier for you.
The best solution would be to shop around at different banks and online to see who is willing to offer you the more favorable conditions. The more equity you have in your home, the more willing banks will be to work with you. When you refinance with bad credit, you can expect to pay more for the loan in the form of points paid up front. Often these are rolled into the loan, but may be required upfront at closing.
Your interest rate for the refinance will be higher as well than it would be for someone with perfect credit, but that higher rate may still be less than you’re paying now in interest and it may also be the best long-term strategy for paying down debt. Once you’ve refinanced and paid off your debt, you can rebuild your credit, let your equity continue to build and consider refinancing again in a few years for the best terms available. All told, refinancing is often the best option for you if you have bad credit, but be prepared to shop around and work for the terms you need.