As a general rule of thumb, it is recommended that you avoid refinancing your home if your credit score is low. This is because it can be harder to find a lender to refinance your loan and you can wind up paying a higher interest rate. However, there are always exceptions to the rules and refinancing can prove to be beneficial, even if you have bad credit, in a few scenarios. Here are a few of the reasons why you may want to consider refinancing your home, even if you have bad credit.
To Get Rid of PMI Insurance
If you could not afford to place a down payment of 20 percent or more down when you bought your home, you likely are carrying PMI insurance as part of your mortgage payment. PMI, or private mortgage insurance, helps to protect the lender in case the value of your home decreases and they have to foreclose and sell the home. This ensures they don't take the loss due to the decreased value. If your home's value has increased since you have purchased it, and you have developed equity in the home, you may be able to refinance the home and stop paying PMI insurance. This lowers your mortgage payment. However, before you do so, check to see how close you are to PMI insurance being dropped by your lender. Many lenders automatically drop the insurance when you owe 78 percent of the purchase price of the home. If they automatically drop it, you don't have to worry about refinancing and paying closing costs.
To Lower Your Interest Rate
Interest rates fluctuate. They are currently considered to be fairly low, especially based on what they were 15 to 20 years ago. If you purchased your home and interest rates have since lowered, refinancing my help you to lower your interest rates, which reduces your mortgage payment. However, when you have bad credit it is important to understand that you will not get the best rates out there. As such, you should find out what rates you will qualify for and then determine if they are lower than what you are paying now. If they are, it may be worth it to refinance, even with bad credit.
To Refinance Into a Conventional Mortgage
The last reason you may want to refinance, even if you have bad credit, is because you are refinancing into a conventional mortgage. If you had poor credit when you bought the home and/or a low down payment, the only loans you may have qualified for may have been unconventional ones, like interest only loans or loans with balloon payments. As the price of your home has increased and/or as you have built up equity in your home, you may now qualify for more conventional loans, even with bad credit. Conventional loans help to lower your payment and help you to know what your monthly payment will be from month to month.
Many people assume that they can't refinance when they have bad credit. This is not true. While it is not ideal to refinance with bad credit, it can help put you in a better position. Talk to a lender or mortgage specialist today, such as at Liberty Escrow Inc, to find out what your options may be when it comes to refinancing your home with bad credit.