Bad Credit Home Refinance Loan Terms Defined

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A home refinance with bad credit is possible in almost any economic conditions, but borrowers need to be aware that a low credit score or poor credit history will yield more restrictive loan terms. The following information explains the terms and the effects of bad credit on home refinance.

Credit Score and History
Before referring to specific loan terms it is important to understand how refinancing works and the impact of your credit score and history.

A home refinance with bad credit or good credit means you are taking out a loan to pay off your existing mortgage. Homeowners do this when interest rates are falling to get a better rate, when interest rates are rising to lock in a rate on an adjustable rate mortgage, or when their personal financial circumstances have improved so that they can get better loan terms.

Every borrower has a profile with the main credit reporting bureaus: Experian, Equifax and TransUnion. Lenders report all your lending activity, and that comprises your credit history. A number of factors, including your credit history, are used to develop a credit score for you. The credit score is calculated by the Fair Isaac Corp. and ranges between 300 and 850 points. The U.S. median credit score is about 720. A score of 760 or above is excellent, 620 or below is poor.

Interest Rates
All loans represent risk to the lender. The amount of risk will affect the interest rate you will be offered. If you have a poor credit score, poor credit history and little security, your bad credit home refinance loan terms will include an above market interest rate. If you can qualify for a loan, you will likely be offered a rate two to three percentage points above good credit borrowers.

Repayment Terms
The length of a loan is another loan term, and it also will affect the interest rate you are offered. In general, the longer the loan the longer the lender’s money is at risk and the higher the interest rate. This can be offset in some measure by a home with a good prospect of increasing value. However, it can be negatively offset, resulting in higher rates, by your poor credit. Traditionally, home mortgages have been for 30 years. That has changed with adjustable rate mortgages; mortgages with shorter terms and balloon payments; and even very long term mortgages, some up to 50 years. When pursuing a home refinance with bad credit, your credit score will affect length of repayment terms.

All loans have fees and closing costs associated with them. In a bad credit home refinance, you might be expected to pay a higher than anticipated number of points. This, in effect, pays interest in advance so that you can be offered a lower interest rate and therefore, a lower monthly payment for which you can more easily qualify. However, this requires that you have cash on hand to meet the higher costs.

Be careful to review penalties in a bad credit home refinance. Because you are considered a higher risk with bad credit, your loan terms could include more stringent penalties for late payments, including foreclosure or reset to a higher intere