Mortgage Tips Pros and Cons of Refinance Loans for People with Bad Credit
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Mortgage Tips: Pros and Cons of Refinance Loans for People with Bad Credit
If you’re grappling with high credit card bills and your credit rating is slipping, a home equity loan can offer a quick fix. Once the loan closes, you can use the cash on hand to pay off debts, leading to an immediate improvement in your credit score.
Banking executive Dan Ambrose calls these "band-aid loans," often referred to as the 2/28 in mortgage terms. These short-term loans typically offer a fixed rate for two years before switching to a variable rate.
Ambrose discusses 30-year refinancing mortgages tailored for those with less-than-perfect credit. These loans start with a set interest rate for the initial two years but then shift to a variable rate, which changes with the prime rate.
However, there's a downside. Lenders often charge higher rates for those with lower credit scores. Ambrose advises preparing for when the loan adjusts, as you might face a higher interest rate than your original mortgage, increasing monthly payments.
Despite this, if you utilize the equity to fully pay off your debts, maintaining perfect mortgage payments for 18 months can significantly boost your credit score, making you more appealing to banks.
Before opting for a home equity loan, consider your local housing market. Ambrose notes that real estate values are dropping, potentially affecting the equity you can access. Lower home values may result in insufficient equity to cover your debts. If your payments increase after two years, you could end up in a tighter spot.
For those with marginal credit or no equity, options like a 125% loan are available. This allows you to borrow more than your home's worth. Consult a mortgage professional to assess whether the risk is justified. Ambrose emphasizes using the equity to clear debts rather than financing a dream vacation.
In summary, while refinance loans can be beneficial, they come with risks and should be considered carefully, especially for those with bad credit.
You can find the original non-AI version of this article here: Mortgage Tips Pros and Cons of Refinance Loans for People with Bad Credit.
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