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Bad Credit Mortgage Refinancing

Three Rules of Thumb for Mortgage Refinancing

You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that¡¯s not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities.

Rule 1: Don¡¯t Ignore Total Interest Costs

You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.

When people refinance, they tend to focus solely on the loan interest rate. But they often don¡¯t pay as much attention to the loan term or the loan balance.

When you use refinancing¡ªeven refinancing at a lower interest rate¡ªto increase your borrowing or to extend the time over which you borrow, you often aren¡¯t saving money.

Rule 2: Trade Expensive Money for Cheap Money

For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan¡ªthis is the best measure of the new loan¡¯s interest rate cost¡ªand then compare this to the loan interest rate on your old loan.

You don¡¯t want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.

Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that¡¯s all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number.

Rule 3: Don¡¯t Lengthen the Repayment Period

Be careful that you don¡¯t extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid.

Can You Refinance a Home with Poor Credit?

Because of low interest rates, many people are refinancing their homes. While individuals with good credit have little difficulty refinancing their home mortgage, if you have bad credit, you may have to search for a lender that will offer a good deal. Nonetheless, refinancing with poor credit is possible

What is a Mortgage Refinance?

When you refinance your home, you are creating a new mortgage to replace the existing mortgage. Because the process is similar to applying for a new home loan, you are expected to pay closing costs and other fees such as title search, attorney fees, and prepayment penalty fees. If you are unable to pay additional fees, refinancing is not the right option.

Why Refinance a Home Mortgage?

There are several reasons for refinancing your home mortgage. For starters, if you purchased your home before interest rates decreased, you likely have a fixed rate that is at least three points higher than current trends. In this case, refinancing is a smart choice ¨C if you plan on staying in your home. By refinancing your current loan, you may save hundreds of dollars a month.

Furthermore, refinancing is perfect for individuals who received an adjustable rate mortgage. Adjustable rate mortgages fluctuate throughout the duration of the loan. Thus, your mortgage payments may increase. By refinancing to a fixed mortgage rate, your monthly mortgage payment remains the same.

Bad Credit Refinancing

Refinancing a home loan with bad credit requires effort on your part. You have to search for the best deal. Because of your credit situation, most lenders will take advantage of you. They will charge a huge interest rate and huge fees because they know your options are limited.

When applying for a refinancing, contact your current mortgage lender. If your payment history is good with this lender, they may be willing to negotiate a decent rate. Before signing on the dotted line, you must shop around.

Sub prime lenders are another great alternative. Because these lenders specialize in high risk loans, they have various loan programs for individuals with poor credit. Submitting an application online is the quickest and easiest method for obtaining a quote.