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[R145]Refinancing Mortgage With Bad Credit

by Connie Barker, Con

Refinancing has become extremely popular over the last few years mainly due to the historical low interest rates available. While today's interests rate are a drop higher than its historical lows, it makes a lot of sense to refinance your existing home mortgage in order to save money on interest, or to take out a home equity loan on the rising value of your home. Here are some tips.

If you have bad credit, believe it or not refinancing your current mortgage can help. Most people fall into the rut of bad credit because their interest payments are too high and because they have too many credit cards with revolving debt. By refinancing your current mortgage, you can not only get a lower monthly payment, but if you have built up any value in your property you can in many situations also take out a home equity loan which is a loan based upon your home's worth. With a home equity loan, your home is used as collateral so lenders are much more secure and open to giving a person a loan because it is far less risky than an unsecured loan.

If you have bad credit you can refinance your home mortgage and pay off your credit card debts, improving your credit substantially. You will also only have one loan to pay each month at a lower interest rate than most credit cards so it should be easier to pay off.

If you have very bad credit, you probably still will be able to be approved for refinancing your mortgage, however the interest rate may be higher than quoted for good credit holders and less amount of your home's value may be able to be refinanced. For instance, if your home is worth 250K, you might be only able to refinance up to 200K.

If you are looking to refinance your existing home mortgage, don't let bad credit stand in your way. In fact, refinancing your mortgage can improve your credit situation.

Points are an upfront fee charged by the lender. This fee is separate from interest and is designed to increase the profit to the lender. The cost to purchase one point is equal to 1% of the total principal amount of the loan. By purchasing points will lower your interest rate.

Whether purchase points is a good idea for you or not depends on if you will maintain the property long enough to recover the additional cost incurred from purchasing the points. For example, a lender gives Jane Jordan the option of a $90,000 loan at an 8% fixed interest rate. A 2-point purchase would cost $1800 due and payable at closing. The lender also offers a $90,000 loan at 9% with no points available. It will take over 2 ½ years to recover the $1800 paid for points. If Jane plans to remain at that location for longer than that time she will break even or make a profit. If she anticipates relocation under that time frame, refinancing and purchasing points will cost her money and is not worth it.

When considering buying points, also crunch some numbers on what that same amount of money invested in another way could generate if there were a higher rate of return. It is important to know what your goals are when refinancing so that you can make good decisions.

If you are financing new mortgage loans, purchasing points on a residential mortgage can deduct the money that you need to pay on that year's income tax return. However, if you are buying points to refinance your home, the IRS considers this prepaid interest. This means, you will have to deduct them over the life of the loan rather than all at once at closing. You will need to some advice from your tax advisor or your accountant for his or her expert opinion on point deduction.

If your ultimate goal is to be debt-free then purchasing points may allow you to achieve that goal in less time. Only you know the details of your situation and it is important that you consider all aspects of your life and finances that could affect your goals, your mortgage refinance and your overall financial plan before making any significant financial decisions. See below for more information on Mortgage Refinancing.

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About Author

Both Connie Barker & Charley Hwang are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Connie Barker has sinced written about articles on various topics from History, Finances and Debt Consolidation. Connie Barker is the owner of several informational financial websites including those dealing with