Do you want a lower monthly payment? Perhaps you prefer to switch your adjustable rate mortgage to a fixed rate. If this sounds familiar, refinancing your home may serve to your advantage. In the past five years, mortgage interest rates have dropped dramatically. Thus, many people who purchased homes when rates were high refinanced their homes. Refinance involves creating a new home mortgage, and homeowners must re-apply for a home loan. With this said, refinancing sounds great for individuals with good credit. However, refinance loans for bad credit are widely available.
Refinance Home Loans
Ordinarily, a person with bad credit would have a difficult time obtaining a loan. This is because a persons credit worthiness is based on information included in their credit report. Individuals with a history of paying bills late or refusing to pay their creditors are considered high risk candidates, thus lenders are unwilling to loan money to them. However, refinance loans are different. When a homeowner refinances, their house serves as the collateral. Therefore, if a person defaults on the loan, the lender may take possession of their home.
Knowing When to Refinance
The key to refinancing a home involves knowing when to refinance. Commercials and radio advertise low interest rates. Thus, many homeowners choose to take advantage of low rates and lower their monthly payments. Unfortunately, the cost of refinancing a home may sometimes outweigh the savings. Because a refinance creates a new mortgage, homeowners are responsible for fees such as closing costs, title search fees, settlement fees, prepayment penalty fees, etc. Moreover, some mistakenly refinance before a home has time to build sufficient equity. Another reason for refinancing a home includes receiving a shorter term, which may also boost a home’s equity
One benefit to refinancing a home with poor credit is that homeowners may receive a lump sum at closing. This money may be used to improve credit – pay off credit cards, consumer debt, etc. For this to happen, a property must have ample equity. Some mortgage professionals encourage homeowners to keep an original mortgage for at least two years before refinancing. This allows the property value and equity to grow.
By: Carrie Reeder
Posts Tagged ‘Lump Sum’
Refinance Home Loans with Bad Credit – Knowing When to Refinance
February 15th, 2010Home Equity Loans vs. Refinance Loans
January 30th, 2010
To many people, there seems to be very little difference between a home equity loan and a refinance loan. However, there are some differences. You will find that a home equity loan, whether it looks like a more traditional loan or a line of credit, offers a little more flexibility. However, the refinance loan usually offers a lower interest rate. Both types of loans, however, have interest that is tax deductible. Make sure you understand the features of both before making a decision between home equity loans vs. refinance loans.
Home Equity Loans
Included in home equity loans are home equity lines of credit. You can decide how much of your equity you want to use as collateral for the loan. Equity is how much you “own” of your home. It is the difference between how much you have left to pay on your home loan and how much your home is worth on the current market. You can borrow part of your equity, or you can borrow all of it. Additionally, you can choose how you want to receive the money: as a lump sum or as a line of credit. This can allow you some flexibility. If you choose the line of credit, you don’t have to borrow up to the limit, but more is available if you need it.
Refinance Loans
While some of the accumulated equity in your home is used in a refinance loan, the loan is really meant to establish new terms for your loan. The entire mortgage is redone, and some of the accumulated equity you have can be added in for a “cash out,” where you take cash and your home is refinanced for an amount that is higher over all. You have no decision as to how to take your loan. It is lump sum. It is applied to “pay off” your “old” mortgage, and the remainder, the “cash out” portion, is given to you. Usually, it is possible to spread the terms out over a longer period of time than a home equity loan, and you usually end up with a lower interest rate.
Home Equity Loans vs. Refinance Loans: Which is Best For You?
You have to decide which would work best for you. If your purpose is to mainly to fix an interest rate or change the loan term to something longer or shorter, and maybe get a little extra cash to pay some bills or take a vacation, the home refinance loan may work best for you. However, if you are looking for flexibility, and you are not sure exactly how much you need, a home equity loan, in the form of a line of credit, might be your best option. Do your research, though, and shop around for a loan that suits your specific needs.
By: L. Sampson