All over the Internet and television lenders are advising people to refinance their homes. There are even lenders that are offering to refinance your mortgage with bad credit. These lenders, however, don’t explain the perils of mortgage refinance with bad credit. They don’t mention the insane interest rates, high fees and poor terms.

When the rates go down, everyone scrambles to refinance all loans. The problem comes when one tries to refinance with bad credit. The very point of refinancing is to relieve high monthly payments, lower the cost of the loan in the long term and lock in a better interest rate. Bad credit borrowers get the highest rate of interest possible, they also may not qualify for the full amount of the home’s worth. Bad credit affects not only the interest rate, it affects the terms of the loan and the total amount lent.

Mortgage refinance with bad credit can be financial suicide because the terms cause borrowers to pay thousands of extra dollars in interest. Often a shady mortgage broker will offer a refinance with very low monthly payments, what isn’t explained in any detail is that the loan is extended to a longer period. The result is a lower monthly payment and $20,000 to $100,000 in extra interest.

While refinancing may seem like a good idea, every time your credit is ran for a loan, your credit score weakens. The weaker your credit score the higher the interest rates will be for the borrower. It’s a cycle that can ruin credit for months. A better option for those with poor credit is to repair the credit before refinancing.

Repairing your credit can save hundreds of thousands of dollars. Take, for example, a typical mortgage of $150,000 at a rate of 12% interest (a typical rate for poor credit). Over a course of 30 years, the monthly payments would be almost $1600 and the total interest paid will be approximately $405,000. Reduce the interest rate to even 10% and the savings is nearly $780,000. Improving your credit by just 2% saves nearly $80,000, imagine what improving interest enough to get a 7% refinance. If you haven’t worked out the math, it works out to near $195,000.

The best way to refinance your mortgage is to improve your credit score. You can do that by reducing your debt to income (the amount of your month recurring debt divided by your monthly gross income), making timely payments on a loan and consulting a reputable credit counselor. All of those things can save money.

If, however, you can get a better rate of financing than your current mortgage, you’ll need to know how to refinance your mortgage with bad credit. One of the best ways to refinance any loan with bad credit is to get your credit score. Since one of the major factors of financing is your FICO score, knowing this information will allow you to get a feel for the interest rates for which you qualify. Simply applying for loans can lower your credit score (not for a long period of time, however). Knowing your credit score can save you from unscrupulous loan brokers who offer a credit score higher than for that which you qualify.

Whichever type of loan you get, be sure to read all of the terms. Sometimes fees are tacked into the contracts and can add up to thousands of dollars. Know what you qualify for and don’t be afraid to go somewhere else if you’re offered poor terms.

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