Sapphire Editorial Blog

Your home may also have increased in value, giving you a lot more equity. Having a lower debt-to-equity ratio can mean a lower interest rate, or the additional equity means that you might be able to get additional cash out in a refinance. Getting additional cash means that you may be able to restructure your debt by paying off high-interest loans with the lower-interest mortgage.

If you currently have an interest-only mortgage with a variable rate, you might want to lock in historically low interest rates with a fixed-rate loan. Rates are so low that even those with bad credit are seeing better rates than in previous years.

Disadvantages of refinancing

While a refinance may look very appealing, particularly if your financial situation is not the best, there are a few things to consider carefully before going ahead.

Even if you get a lower interest rate and lower payments, you will also be paying hundreds, or even thousands, of dollars in fees. Most banks will charge a loan fee, and there are others like title and appraisal fees. Make sure that the money you save in interest more than covers the fees.

Many refinances also involve extending the terms of the loan. While this will probably decrease your payments, you may end up paying a great deal more in interest over the life of the loan. You will have to weigh if having the lower payments now is worth paying so much more in the long run.

Paying off high-interest credit cards with a low-interest mortgage sounds very appealing, but it can be risky. Many people pay off the cards only to run up the balances again. Then they are stuck with the same credit card payments in additional to a higher mortgage payment. If you pay off credit cards, close the accounts, or decrease the number of cards to one or two to be used only in an emergency. Don’t put your house on the line because you can’t stop spending.

How to refinance with bad credit

Generally, the rule is that refinancing makes the most sense if your credit score has improved from when you first applied for the loan. Often though, it is when your credit has suffered that you can benefit from a refinance the most.

As usual, you are at a disadvantage when applying for credit. Lenders will be much stricter and require more documentation than they would from those with good scores. You will be charged higher interest rates than other customers. You may find though, that even those higher rates are lower than what you are currently paying.

Consider approaching a credit union with your refinance request. Credit unions generally have much more flexibility in their lending rules than big banks do. They also tend to take a more personal, community-oriented approach, so you won’t be just a number to them.

It’s always best to approach lenders with honesty. Let them know that you know about your credit, and be upfront with any information or explanations that might help mitigate the derogatory information. Be prepared with at least three years of financial information. If the lender feels you are being open and honest, he or she will feel much more comfortable about taking a chance on you.

Make sure that your credit report is accurate. Even if you have a lot of derogatory information, there shouldn’t be any more than you deserve. Removing just a few errors can do a lot to improve your score.

If you are having trouble finding traditional lenders to work with, use a mortgage broker. Brokers will have access to all kinds of financing options, including private credit that would be difficult for you to find on your own.

As always, be wary of those lenders who approach you with terms that seem unrealistic for someone in your situation. You can expect to find people who will lend to you, but you can also expect to pay a higher rate simply because you present a higher risk.

Refinancing when you have bad credit can be a challenge, but it may also be the best time to restructure your finances and take advantage of lower rates and payments. Just be aware that you may have to try a few different things and possibly take advantage of less traditional lending sources.

Even if you have poor credit, you can benefit from refinancing your mortgage if you can reduce payments and consolidate other debt.