Bad Credit Refinancing - Because banks charge high interest rates on loans made to homeowners with bad credit, these homeowners often have no intention of keeping the loan for more than a year or two. They plan on refinancing their mortgages to a lower rate at least once more when they have repaired their credit profile. Therefore, homeowners with bad credit often opt for Adjustable Rate Mortgages or a Hybrid Loan with a fixed interest rate for the initial 2 years followed by an adjustable rate for the remainder 28 years.
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These ARM's and Hybrids tend to have lower starting rates than the 30-year fixed rate mortgages. Although a 2 year ARM does carry a risk of a higher mortgage payment after the initial fixed period. If you are unable to increase your credit and refinance into a better loan you may be stuck with payments that increase every 1-6 months. A fixed rate bad credit loan is a better choice because it gives you ample time to increase your credit score.
Prepayment penalties may be one of the biggest obstacles to refinancing when you have bad credit. These penalties vary from state to state but the main purpose is to protect the lender from losing money when taking on higher risk mortgages. Depending on the lender you may be able to buy out or buy down the prepayment penalty. Your interest rate will usually increase when you buy out or buy down you prepayment penalty. In addition to prepayment penalties lenders often charge higher interest rates for borrowers with bad credit to offset the higher risk.
Bad credit refinancing may help some borrowers improve their credit rating if the money from loan proceeds are used to pay off debts. This can improve monthly cash flow helping them make all monthly payments on time. Bad credit, no credit or good credit. If you are thinking about refinancing you should check with your loan officer or mortgage broker to see what you qualify for. Never count yourself out of the game because you just might be surprised.
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