Mortgage Tips: Pros and Cons of Refinance Loans for People with Bad Credit


If you’re stuck under some high credit card bills and your credit rating is slipping, one of the best ways to immediately improve your credit is a home equity loan. When the loan closes, home owners have cash-on-hand to pay off bills. The result: their credit rating starts to improve immediately.

Banking executive Dan Ambrose refers to those as the band-aid loans, also known as the 2/28 in mortgage lingo.

Most sub-time loans are short term loans, not A paper market, which means a fixed rate for two years then the loan adjusts.

He’s talking about 30 year refinancing mortgages for people with less than stellar credit. Lenders offer a home-equity loan at a set interest rate for two years, and then the loan converts to a variable rate loan, where the interest rate fluctuates with the prime rate at the time.

That’s the down-side to the band-aid loan. Lenders usually charge higher interest rates for people with lower credit scores. Dan warns consumers to prepare themselves for when the loan converts. Home owners could face a higher interest rate than the original home loan, and their monthly payments could hit them harder.

If consumers take the cash from their equity loan and pay-off their bills in full, after 18 months of perfect mortgage payments, Dan says the consumer’s credit improves to the point that now every bank will deal with them

If you think a home-equity loan could save you form your creditors, watch out for the current housing market in your area. Watching the marketplace, I saw the writing on the wall, says Dan. The real estate values are going down. They’re starting to slow down drastically.

And there’s the other potential roadblock for homeowners in this situation. Lower home values means less equity and possibly not enough equity to satisfy their payment needs. If the equity isn’t enough to pay all of your bills, and after two years your payments are even higher than before, you could possibly put yourself in a worse situation.

People with marginal credit or no equity do have some options such as the 125% loan to get ahead.

A 125% loan offers you a loan for more than your home is actually worth. Talk to a mortgage professional to make certain the credit risk is worth the return. Dan says most importantly; use the equity cash to pay-off those bills before you splurge on your dream vacation.