If you have bad credit and are looking to refinance your mortgage with bad credit, what exactly can you do?
Firstly, don’t be too alarmed. The good news is that even though banks have made their lending standards more difficult in the recent years, it is still feasible to refinance your mortgage even with a mark on your credit history.
The bad news, is that getting a refinance or other home loan becomes moderately more expensive the lower your credit score is. The question is not whether you can refinance your mortgage, but if you can do so on terms that make it worthwhile.
How Much Will You Have to Pay?
Based on how poor your credit is, you may not be able to get a rate as low as you had hoped. A borrower with a credit score of 620 can expect to pay a rate about 1.5 percentage points higher than a borrower with perfect credit on the same loan, assuming the bank will approve them in the first place.
A higher score of around 680 may mean that you’ll pay only about half a percent more than a percent more than a borrower with a “perfect” score of 760 or more. Bear in mind, however, that other factors, such as the amount of home equity you have, will affect your rate as well.
Borrowers with a credit score below 600 will generally have a hard time refinancing. There may be a few lenders that will approve them, but they can expect to pay a rate considerably higher than other homeowners.
If you have a poor credit rating due to a serious mortgage delinquency (a missed payment more than 90 days late), you likely won’t be able to refinance. A loan modification may be a more realistic option. Contact your mortgage servicer (the company you send your mortgage payments to) to inquire about options.
However, if your poor credit is due to lesser factors, such as an occasional late payment or high levels of credit card debt, and you’re currently paying a high rate on your mortgage, you may still be able to refinance even if you don’t qualify for the lowest rates available.
Should you refinance?
Even if you can’t qualify for the lowest mortgage rates, it may still be worthwhile to refinance if you’re currently paying an unusually high rate. The general rule of thumb is you want to be able to reduce your rate by a full percentage point to make refinancing worthwhile, though a smaller reduction can work if you plan to be in the home a long time.