Refinancing Your Home with Bad Credit: Why It Makes Financial Sense?
Mortgage refinancing is a process that works by swapping out a current mortgage loan for a new one. Some homeowners consider this when the new interest of their loan is lower than the interest rate of their current mortgage. But mortgage refinancing is not always the best strategy. But if you have bad credit, you could be turned down by major financial institutions. Thankfully, some lenders allow you to refinance your home with bad credit on flexible criteria. The following are reasons you may want to refinance your mortgage:
While debt consolidation is usually a good thing, it needs to be done right. Indeed, when it is done wrong, it can be a dangerous financial move you can make. Paying off a debt with high interest seems like a smart move; however, there are possible pitfalls. Keep in mind that by refinancing, you transfer unsecured debt backed by your house as collateral. Thus, not paying your mortgage payments can result in you losing your house. And not paying a related debt such as a credit card debt can lead to a foreclosure.
Moreover, debt consolidation can also help your credit score. You can use the money you get from cash-out refinancing to pay off your credit cards and other bills. In this method, you transfer the debt into your home loan. Because mortgage rates may be lower than credit card rates, your monthly payment goes down and the interest you pay can be tax-deductible. Check with an accountant if it is possible to deduct your interest payments every month from your income taxes.
Reduced Monthly Payments
Generally, decreasing your monthly payments through a lowered interest rate is a sound financial decision. Any percentage of interest rate reduction can make a difference in your payments. But because the refinancing-related fees can be huge, you must explore the numbers and ensure you occupy the mortgaged home for a long time, so you can recover the costs of such kind of transaction.
Refinancing allows you to improve your credit standing. Once you may mortgage payments on time after refinancing, this improved credit can be your ticket to taking out a loan that has lower interest rates.
In general, building credit is a long-term endeavour and can take a lot of years. However, this does not mean you cannot take some steps to improve your credit before you apply to refinance. This is possible by paying down existing debt, getting credit for utilities and rent, as well as asking your credit card provider for higher limits.