Many homeowners who are paying unusually high interest rates on their mortgage loans got into that situation by having bad credit.

In fact, we are seeing a lot of this on the news right now, with the so-called “mortgage crisis.”

Later on down the road, many of these same homeowners will seek ways to lower their interest rate (and thus their mortgage payment) through a bad credit mortgage refinance loan.

But my question is … isn’t this a bit of an oxymoron? A contradiction in terms? In other words, does it even make sense to try and refinance a mortgage loan when you still have a bad credit score?

As with anything else in real estate, these questions can only be answered on a case-by-case basis. But in general, a bad credit mortgage refinance is a bad idea … at least from where I’m standing (with the objective advantage of not working for a mortgage lender).

One of the primary reasons homeowners seek to refinance their home mortgage loans is to secure a lower interest rate on the new loan — and, by extension, save money over the life of the new loan. Generally speaking, there are two ways you can get a lower interest rate on a new mortgage loan: (A) take advantage of a drop in the prime interest rate, or (B) take advantage of your newly improve credit score to negotiate a lower rate on the new loan.

You can probably see why I think the bad credit mortgage refinance is something of a quandary. If you are thinking of refinance your mortgage but you still have bad credit (as compared to the national average), then option ‘B’ above is not really an option for you. In that case the only way for your bad credit mortgage refinance to be worthwhile is if the prime interest rate had dropped considerably.

If you refinance a home mortgage loan with a bad credit score still “haunting” you, then you will still be viewed as a subprime borrower in the eyes of most mortgage lenders. Thus, they will still charge you a much higher interest rate on the new loan than they would charge a borrower with good credit.

So whenever somebody asks me about bad credit mortgage refinance as a financial option, I usually tell them to focus on improving their credit score before trying to refinance the loan. That way, you can secure a lower interest rate (in most cases) and make your mortgage refinance worthwhile.

Related articles:

• Increase Your Credit Score Before Refinancing
• When to Refinance a Mortgage Loan

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If you have begun to research the mortgage refinance process, you have probably made an important discovery regarding calculators. In order to determine if a refi is the right financial move, you must first run the numbers to determine your savings.

Because let’s remember the all-important rule of thumb: If the money you pay to refinance your mortgage (the closing costs associated with it) exceeds the money you save over the term of the new loan, then it doesn’t make any sense to refinance the loan.

This is where calculators come into the picture. A refinance mortgage calculator can help you run the numbers to see where you’ll come out after the refi. More specifically, it will help you compare your current mortgage payments to your new payments after refinancing the mortgage. You can then compare your savings to what you might expect to pay in closing costs to see if the refinance makes sense.

That’s why I always tell people to start the research process by using a refinance mortgage calculator to run the numbers. The question is, where do you find the best refinance mortgage calculator … or does such a thing even exist?

Here’s my advice to you. I wouldn’t rely on just one refinance calculator. I would bookmark two or three of them and use them all to validate one another. It’s kind of like using a scale to weight something. How do you really know if the scale is accurate? You don’t, unless you compare it against other scales to validate the reading.

You can do the same thing with refinance mortgage calculators — and I highly encourage you to do so. So instead of searching high and low for the best refinance calculator (and wearing yourself out in the process), just find two or three decent calculators and use them all.

If you’d like, you can start with the one we have on our Resources page. Then all you have to do is find a couple more calculators and bookmark them for future reference.

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In most cases, the whole point of refinancing a mortgage loan is to secure a lower interest rate than what you’re currently paying on your home loan. In doing so, you can lower your monthly mortgage payment as well, which can save you a lot of money over the life of the new loan.

But you have to know what the interest rates are doing in order to make smart decisions about refinancing your home loan. And according to a recent article by the San Francisco Chronicle, interest rates are likely to fluctuate some more as a result of recent actions by the government.

To quote the article:

The economic stimulus bill that President Bush signed Wednesday has plunged people who are trying to buy or refinance an expensive home into jumbo limbo. The bill raises the maximum mortgage that can be purchased by guarantors Fannie Mae and Freddie Mac. Today that limit is $417,000 across the continental United States. Anything below that limit is called a conforming loan; anything above it is a jumbo. -Source

What does this mean if you’re planning to refinance your home mortgage loan? Well, for one thing it means the rate quote you get today from lenders might be different from the rate you get a month from now. That’s always the case in a dynamic economy like ours. But it’s even more true given the recent stimulus actions by the government … and the economical impact of those actions.

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