Bad Credit Refinance
If you are living in your home for a long period of time or if you have sufficient equity in your home you may be able to do a bad credit refinance. People who purchased a home some time ago may be paying a very high interest rate causing their monthly mortgage payments to be very high. By opting for a bad credit refinance they they can avail of today’s low interest rates and in the process lower their monthly mortgage payment considerably, freeing up scarce cash to meet other obligations like car payments or credit card bills.
If your credit is bad the lender doing the bad credit refinance will require that the borrower has sufficient equity in the home or has some cash to bring to the table. Typically a bad credit refinance will be for a minimum of 80% of the homes market value and in some cases the lender will only loan 60% to 70% of the homes appraised market value.
Bad Credit Refinance Rates
Unfortunately because of the perceived risk in lending to a borrower with bad credit the interest rate available for a bad credit refinance will be higher than those quoted in the national media. If the borrower has cash available they can buy down the rate by paying some points up front. A point is 1% of the mortgage amount. If you have an adjustable rate mortgage that is about to jump it may be worthwhile considering bringing money to the closing table if it allows you to get into a low rate fixed mortgage.
Bad Credit Refinance Equity
If you have a large equity position in the home is will be possible to refinance into a lower rate simply because the loan ammount to be advanced may be only 50% to 60% of the appraised value of the home. In some cases it will be possible to do a bad credit refinance and walk away form the closing with a substantial amount of cash. This is called a cash out refinance.
There is also a produce called a bad credit home equity loan that is available for borrowers with bad credit who have a large equity position in their home. Basically the lender would either take out a second mortgage for the amount being borrowed or pay off the sitting first mortgage and place a new first mortgage on the property for the outstanding balance of the paid off first mortgage plus the equity amount being borrowed.
What is Equity
Equity simply put is the difference between what you owe on your home and the current market value of your home:
- Appraised current market value of home = $250,000.00
- Total outstanding debt secured by home = $150,000.00
- Equity you hold in your home = $100,000.00
How much Can I Borrow
Typically a bad credit refinance or bad credit equity loan will be for 70% of thecurrent appraised market value of the home.
This applies to a bad credit equity loan:
- Appraised current market value of home = $250,000.00
- Maximum loan available at 70% LVA = $175,000.00
- Current outstanding secured by home = $150,000.00
- Maximum Equity Loan available = $ 25,000.00
This applies to a bad credit refinance:
Appraised current market value of home = $250,000.00
Maximum loan available at 70% LVA = $175,000.00
Current outstanding secured by home = $150,000.00
In this scenario the borrower could either simply refinance into a lower rate by taking out a $150,000.00 bad credit refinance mortgage or the borrower could take out a $175,000.00 bad credit refinance mortgage and get a lower rate plus walk home with a check for $25,000.00
Your Home is At Risk
While is is a good thing to lower your rate or even get your hands on some much needed cash it is imperative that you understand that a mortgage is a security instrument securing a home loan note. If you fail to honor the terms of the note the mortgage gives the lender the absolute right to foreclose on your home and evict you from it.
