Mortgage borrowers often consider refinancing an existing home loan to better their circumstances in some way. Refinancing replaces your current mortgage with a new loan which likely has better interest rates and a lower monthly mortgage payment. The new loan funds are used to pay off the current mortgage loan, and any equity, or leftover funds, can be used by the borrower.
Why Refinance?
One of the most often cited reasons for refinancing is to get a better interest rate, which can save thousands of dollars over time and make monthly payments much more affordable. Interest rates fluctuate over time, and often when rates dip low, many borrowers will seek to refinance. Borrowers with poor credit often find that their mortgage rates are extremely high, and over time their credit scores have improved and they wish to refinance to get better terms and a lower interest rate.
Other reasons to refinance include lowering overall debt by using the equity or leftover money available after paying off the previous mortgage, to pay off other bills and lower the amount of money going to monthly payments on credit cards or other loans. Reducing debt and monthly payments can improve the credit rating of a borrower with poor credit.
Often borrowers with bad credit find themselves with a mortgage that requires a balloon payment. A loan that includes a balloon payment means that the borrower will have to pay off the entire remaining balance in one lump sum after specified period of time has elapsed. The normal balloon payment period is five years. If the borrower is unable to pay off the entire balloon payment, or balance of the loan, the must refinance, sell their home, or lose it to the bank. Borrowers with a balloon payment due often need to refinance to keep their home.
How to Refinance
Just like getting a first home loan, refinancing takes time and knowledge of how to get the best terms and rates available. When a borrower has a bad credit score, it can be even more difficult to get a good rate that will save money and lower payments.
Working with a high risk lender can help a bad credit borrower find the best rates available to them. High risk lenders charge a higher interest rate for these loans, to offset the risk of lending to a riskier investment. Before deciding to refinance, borrowers can improve their chances of being approved and getting a better interest rate by improving their credit scores over time.
Refinancing can often improve a borrower’s situation by lowering payments, saving money in the long run, or satisfying the terms of a previous high risk mortgage requiring a balloon payment. However, just as a consumer need beware when shopping for a first mortgage, shopping for a refinancing mortgage is just as important. To make a well-informed, confident decision, borrowers need to shop around, consider the numbers, and ask plenty of questions.
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