Bad Credit Mortgage Refinance - An Oxymoron?
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.
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