Mortgage payments make up most people's most significant expense on their budget and can be stressful. Refinancing offers a way to pay off the old loan and start a new agreement with a credit lender in hopes of lowering the monthly payment or interest rate. This is a great option to provide relief in monthly payments. Many people consider refinancing their mortgage, but they tend to shy away from this option, thinking it is not available for them because they have bad credit. The truth is there are many options available for people to refinance their mortgage even if their credit is less than good, and they can find relief in lowering their monthly mortgage.
Benefits of Refinance
Refinancing can provide many benefits to all homeowners, and they can vary from person to person depending on several factors. Refinancing your home is not a decision that homeowners should take lightly, as refinance requires appraisals, title searches, and application fees. A homeowner should only consider refinancing if the refinance is beneficial, and the math shows that the homeowner will save money in the long term. Here are the benefits and reasons why a homeowner may choose to refinance.
Lower the Interest Rate
The most common reason people refinance is due to lower interest rates. The average interest rates vary yearly, and homeowners may benefit when these interest rates dip. People will also choose to refinance to get a lower rate if their credit situation has improved. Homeowners should consider this only if the interest rate is lowered by 1-2%.
Lower Monthly Payments
Many people look to lower their monthly payments to provide financial relief. Lower interest rates lead to lower monthly payments and keep the payoff date the same. Homeowners can extend the loan payoff date and pay less principal every month to lower monthly mortgage payments even further.
Shorten the Loans term
Many people are opting for shorter loans to pay off their homes quicker. They will take advantage when interest rates drop to maintain or lower their monthly payments while simultaneously shortening their loan term. Interest rates tend to be lower on 15-year mortgages and can save significantly if they can pay the loan off in half the time.
Change the type of loan
There are two types of loans, an adjustable-rate mortgage (ARM) or a fixed-rate loan for homeowners. Adjustable-rate mortgages are appealing initially due to their low-interest rate offerings, but the adjustments can result in high increases. Converting an ARM to a fixed-rate loan can help reduce their home's interest rate and lock in the rate to ensure there is no future price hike.
Use Equity
Refinancing can provide homeowners with a way to tap into the money they have put into their homes to cover significant expenses or pay off their debts. Replacing high-interest debt with low-interest debt can be beneficial and provide financial relief; however, it extends the length of time the homeowners will have to repay the mortgage.
Combine Two Mortgages
If there are two mortgages on the home, refinancing offers a way for homeowners to combine the two loans into one. It does not reduce the home equity and can provide the homeowner with a lower rate. The convenience of one monthly payment is ideal for homeowners.
Cancel Mortgage Insurance
Mortgage insurance is added on to home loans when the homeowner does not pay 20% down during the home's initial purchase. When the home's equity reaches 20%, homeowners can refinance to remove the premium built into the interest rate.
Remove Person from Mortgage
When someone no longer wants or can be held financially responsible for the loan, refinancing is a way to remove their name from the loan agreement. This is helpful if there was initially a co-signer on the loan and would like to be free of the liability.
What Do Lenders Look at When Refinancing with Bad Credit?
A bad credit score can indicate to lenders that a homeowner may not be reliable to pay loans back. Lenders that look at refinancing for people with bad credit will look at other factors in addition to credit score to decide on qualifications for a loan. They will look at
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Credit score
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Debt to income ration
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Employment history
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Down payment
Every lender will have different requirements, and it will be valuable to shop around at a few lenders to check rates and qualifications before choosing one refinancing program.
Refinancing Programs for People with Bad Credit
Refinancing is possible even when credit for homeowners is poor. Many lenders will work with people with bad credit. A homeowner should try to refinance with their current mortgage lender first, as typically, lenders will want to keep the business in-house.
FHA Streamline program - If homeowners have an FHA loan, the FHA Streamline program offers them the ability to refinance even with a low credit score. Homeowners qualify for real-time interest rates, the paperwork is minimal, and if a homeowner refinances with three years, the program may refund the upfront mortgage costs.
USDA Streamlined Assist program - For those who have a USDA-backed home loan, the USDA streamlined assist program is ideal for homeowners with bad credit. The program does not review credit, there are no debt-to-income considerations and does not require a home inspection. Homeowners who make their last 12 monthly mortgage payments on time can qualify for this program.
Quicken or Rocket Mortgage Loans – Refinancing through Quicken Loans provides easy refinancing options through quick prequalification and offers a refinance program for people whose credit score starts at 620. The fees can be higher; however, the interest rates are desirable.
Better Mortgage – Better mortgage provides convenience and ease of use with their online portals for refinancing. The mortgage rates tend to be on the lower side, and applicants with credit scores of 620 can qualify. There are minimal fees to start the refinancing program through Better making it a more affordable choice for refinancing.