Refinance and Second Mortgage Loan Options for People with Bad Credit

Just because you have poor credit doesn’t mean you can’t refinance your home mortgage loan. According to loan officer, Brendon Daly, refinancing your home or adding a second mortgage can help your credit rebound significantly, and will often increase your credit scores with timely payments.

Even with bad credit, as a homeowner, you have several options available to you through the subprime (also known as non-prime) mortgage market including:

o Refinancing with a cash back or debt consolidation loan to help you rebuild your credit and raise your low credit scores by consolidating your 1st and 2nd mortgage loans, and using the extra cash from your home equity to wipe out compounding credit card interest and consolidate your debts.

o Refinancing your variable interest rate first mortgage, second mortgage or home equity line of credit (HELOC) into a fixed interest rate loan which can save you thousands as interest rates continue to climb.

o Cashing out your home’s equity to finance home improvements. Your timely payments will help you rebuild your credit as you build more equity and value into your home.

o Refinancing with a 40 year fixed rate loan, an interest only loan or a hybrid loan if you’re short on money and have a hard time paying your bills. The monthly savings off your mortgage payments could provide some much-needed financial relief as you work towards getting back on your feet. Hybrid loans are a combination of fixed rate and adjustable rate mortgage (ARM) loans, which is why they are also known as “combo mortgage loans.” These loans give you a lower interest rate than fixed rate loans and are less risky than 1-year ARMs.

Bankrate states that subprime mortgages are for borrowers with FICO credit scores under 620. Bankrate goes on to say that subprime loans have higher rates than equivalent prime loans. How much higher depends on factors such as credit score, size of down payment, and what types of delinquencies you’ve had in the recent past. From a mortgage lender’s standpoint, late mortgage or rent payments are worse than late credit card payments.

According to the Mortgage Bankers Association, in 2003 the lenders issued over $276 billion in subprime mortgage loans, roughly 14% of all mortgages, compared to 11% in 2001. The subprime mortgage market witnessed a boom since the 1990s. As a result of this boom, subprime customers seeking bad credit mortgage loans or mortgage loan refinancing no longer have to settle for the first lender that will provide credit. The increased competition within the subprime market has resulted in putting borrowers more in control of lending process by providing them with more choices in lenders and more ways to shop around for the most competitive rates.

Depending on what your situation is, you may end up with a loan that doesn’t carry that much higher an interest rate than a traditional 30 year fixed rate mortgage, and the fees could end up being fairly reasonable. No matter what, though, the rates you get on your bad credit mortgage loan through a subprime lender will definitely be a lot lower than credit card and auto loan interest rates. Besides, you may be able to claim 100% of the interest you pay on your bad credit mortgage loan as tax deductions.

Another thing to remember is that you may be able refinance with a lower interest loan once your FICO credit scores rise to 620 or higher, but you’ll get better interest rates and loan terms once they’re over 650. Janette E. Jones, a mortgage consultant in Bethesda, Maryland states that if your credit score is 650 or above steer away from subprime lenders because you can find a better rate elsewhere. So, refinancing now with a bad credit mortgage loan through a subprime lender may be just what you need to start rebuilding your credit and raising your FICO credit scores in the short term, so you can look forward to paying much lower mortgage rates on a new refinance or second mortgage with much better loan terms later on down the line.

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