Refinancing a Mortgage With Bad Credit

Looking to refinance your home but worried that bad credit might make it impossible to get a good mortgage? Poor credit may make it more difficult to obtain favorable mortgage rates, but there are still ways to benefit from refinancing even if your financial history has some problems.

What is a Bad Credit Refinance?

Refinancing means closing your current mortgage by paying it off and replacing it with a new mortgage that offers a lower interest rate, a different type of interest rate (usually fixed), or cash out from the equity in your home that can be used for other purposes. While someone with a good credit rating can easily refinance their home mortgage, it becomes more complicated if your credit is poor.

For many years, loans from subprime mortgage lenders have been the primary option for those with imperfect credit. These lenders provided higher interest mortgages and other loans to consumers who present higher credit risk. In recent months, all lenders have tightened criteria for lending, and many products that were previously available to people with bad credit are no longer offered.

Despite the challenges involved when seeking a bad credit refinance, it is worth investigating your options if refinancing will ultimately help you get financially healthy again.

Why Would You Refinance Your Mortgage if You Have Poor Credit?

Although it’s not always an easy process, mortgage refinancing can be even more beneficial for someone with bad credit than for people with stable financial histories. Below are some of the advantages of this tactic:

  • Refinancing your mortgage is a smart way to consolidate bills. If late credit card payments or other high interest loans are the source of bad credit, paying them off with cash drawn from your home equity is a sensible way to consolidate debt – but to do so, you’ll need to refinance your mortgage within the limits of having bad credit.
  • Refinancing your mortgage can allow you to take advantage of better market interest rates. If you currently have a variable rate mortgage or a fixed rate mortgage from a higher interest period, you might wish to take advantage of better rates or lock in a low rate. With bad credit, you won’t be able to get prime rates, but you may still be able to lower your interest rate and save money in the long run.
  • Refinancing your mortgage can lower your interest rate. If you had poor credit two or three years ago but have taken measures to improve your credit score since then, refinancing your mortgage now could save you 2 or more percentage points on interest rates compared to the rate you received then – a savings that could substantially lower your monthly payments.

Pros and Cons of Refinancing Your Mortgage with Bad Credit

Refinancing when one has poor bad credit is not an ideal situation, but it does have benefits. Even a bad credit mortgage can help you improve your credit score if you keep up with the payments, although it can adversely impact your credit if you fall behind. If economic troubles, illness, or other factors make it impossible to keep up with your current payments, refinancing to lower your interest rates and bring down your payments to a manageable level can help you stay afloat and prevent negative marks on your credit.

A mortgage refinance for a person with poor credit can cost considerably more than a standard refinance in higher interest rates, larger fees, and higher monthly payments, increasing the risk of putting you into a negative equity situation in an economy with declining property values.

Although it’s wise to keep an eye on payments and make sure you’ll be able to keep up with them before signing on the dotted line, a bad credit mortgage refinancing can be a wise choice if your circumstances warrant it. Make sure to check with several lenders or use a reputable mortgage broker who knows the market and can find the best interest rates and lowest fees available for your credit level.

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