We won't lie to you - between the decline in house prices that's taken hold since the recession kicked off and the number of lenders who've tightened their belts as far as lending goes, the idea of trying to refinance your property while having a bad credit history really doesn't sound like a good idea right now. That isn't to say it's impossible, of course, but the hurdles sitting between you and success are significant enough to make you consider the option of a Bad Credit Loan or other form of credit instead. If you're dead set on trying to go for a bad credit refinance plan though, you need to make sure you've got everything in order before you do so.
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Perhaps the most important thing is knowing why you're determined to refinance in the first place. Are you doing it purely so you can get some cash to spend on things you want? Then you might be better off getting another form of loan, since frivolities aren't generally looked on kindly by banks and mortgage providers. The desire to find a mortgage with a lower interest rate or just a better mortgage provider altogether is a better reason, although this isn't easy in today's financial climate - compared to even as recent as five years ago, mortgages on the whole are rather more expensive and have higher rates of interest, meaning the deal you originally worked out might still be better for you for the foreseeable future.
There's also the idea of freeing up equity - the difference between the amount you still owe on your property and the actual market value - to pay for investments such as home improvements to raise the value of your home, a car or possibly just to put away in a high-interest savings accounts. While this is the kind of decision that banks and mortgage lenders accept though, you need to be sure that there's actually equity available to free up before taking this step. With the recent house prices crashes, many people are discovering that their homes are actually worth less than they believe (and, in some cases, even less than what they paid for them!), making this option pretty much redundant. Ideally, you'll need a minimum of 3% equity available in your home - more, if possible - before a refinancing agreement will be considered, so check your property's value thoroughly before making an application.
Once that's done, there's also the matter of getting your paperwork and other documents in order so that whoever you approach for the refinancing has what they need to make a decision. Can you prove your income for the last few months and your employment status? Do you have the deeds for the property to hand so you can prove you actually own it? Is all the paperwork for your insurance policies on the property up-to-date and valid? All of these things will be evaluated by whoever you're approaching for the refinancing, so it's important to have them handy when making your application.
And then, of course, you've got the small problem of having bad credit on your history. Previously, banks and mortgage lenders would have been cautious anyway when considering refinance applications from bad credit holders, but the recession and near-collapse of the banking system has really made them wary of offering deals that could ultimately leave them at a loss. As such, it's likely that any kind of bad credit refinance agreement will have a high interest rate and possibly repayment stipulations that could potentially cost you more money in the long run - for instance, a deal that appears to offer lower monthly repayments might ultimately increase the amount you owe on the total refinancing. This makes considering a bad credit refinance agreement somewhat risky, so it's worth getting someone on board with experience in helping people with bad credit histories. Find a mortgage broker with a good reputation (and low fees!) who can help show you the options available and you should be able to get the outcome you're looking for without too much hassle.
In Summary
Bad credit refinancing...
May be quite difficult to achieve in today's financial climate Could allow you to improve your interest rate or free up equity in your home Requires you to have confirmed equity available in your property Takes effort in terms of all the paperwork you need to have to hand Could potentially raise the mortgage interest rate or amount of expenditure overall Might be better served by taking out a secured Bad Credit Loan instead
Copyright: Individual Finance, 2010
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