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Bad Credit Mortgage Refinancing
By: Carrie Reeder
Bad credit mortgage refinancing loans are used to solve two different problems.
Problem Number One: The homeowner has bad credit, significant high interest
credit card debt and a home with substantial equity. In order to pay off the
high interest bills, the person refinances his/her home and cashes out all or
part of the equity. The cash from the equity is used to pay off the high
interest obligations. Although the interest rate on the bad credit mortgage
refinancing loan may be higher than that of a conventional loan, the house
payment should still be less than the total of the high interest consumer debt.
A bad credit mortgage refinancing where the owner intents to use the cash from
the home’s equity to pay off bills is called a debt consolidation loan. The
value of the home being refinanced must have grown so that the home's appraised
worth will justify a larger loan. The new loan amount must be high enough that
the owner can cover the loan’s closing costs and still have enough left over to
pay off the credit card debt.
A bad credit mortgage refinancing such as this can have several advantages. The
term of the loan will be longer. Since even a high interest subprime loan
carries a lower interest rate than do high interest credit cards the new house
payment will be smaller than the total of the old house payment and the consumer
debt payments. However, choosing to refinance in this manner carries risks. If
the homeowner does not change the behavior that led to the high debt, even more
high interest credit card bills may be accumulated. Since the homeowner’s equity
has already been “cashed out” of his/her house the only alternative in a money
crunch may be bankruptcy or foreclosure.
If a homeowner chooses a debt consolidation loan as the method of bad credit
mortgage financing, it is imperative to use the cash received to pay off the
accumulated debts. Credit counseling to keep from returning to poor credit
practices should also be considered.
Problem Number Two: The homeowner had bad credit when the home was originally
purchased and had to take out a high interest subprime mortgage loan at that
time. Two or more years have passed since the loan was made during which time
the homeowner has made all of the loan payments on time and has incurred no
other bad credit. Now the time has arrived to refinance the loan and receive a
better interest rate.
Even with two years of excellent credit history, a homeowner trying to refinance
a bad credit mortgage may not be able to obtain a conventional low interest
loan. The type of loan that can be attained will depend on a variety of factors
such as current income and how much debt the homeowner has.
Refinancing a bad credit mortgage under these circumstances may be a good idea
if the following two statements are true.
1. The new loan will carry an interest rate two or more percentage points lower
than the current loan.
2. The homeowner plans to stay in the house for three or more years.
About the Author:
Carrie Reeder is the owner of www.abcloanguide.com, an informational website
about various types of loans. View her recommended Bad Credit Mortgage Refinance
lenders.
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