Refinance With Bad Credit - Pitfalls to Avoid

It's a real dilemma

You have to refinance your mortgage in order to catch up on all your late credit card payments. But because your credit is already so bad, you've been identified as a bad credit risk and can't get approved.

Then you saw a late night cable TV ad about a loan you can get that almost sounds too good to be true.

But before you visit their website or pick up the phone, you need to educate yourself on how to avoid making things any worse.

Protect Yourself
Once you start looking for companies that provide financing for people with bad credit, you'll find a ton of them out there. Of course, the scary part is that you've never heard of them; not only that: they look and sound pretty unprofessional. How can you be sure you're not being ripped off? Here are some things to do to protect yourself.

• Research Sub-Prime Interest Rates
  People with bad credit are called "sub-prime borrowers." They will be charged a higher rate of interest because they are considered more likely to default on their loan. Never mind that by paying a higher rate of interest, it will only make it harder to keep up with the payments -- the lending institution only cares about getting as much of its money back as fast as possible from sub-prime borrowers.
  So watch the interest rate on your loan. If it is more than 2% above the prime rate (and you can check what the current prime rate is online) then do NOT take the loan.
• Shop Around
  Shady lenders know that people with bad credit are desperate; they count on you being in a hurry to take the deal. Don't fall for it. After all, you wouldn't buy a car from the first dealer you visit, would you? Of course not. You'd shop around. The same thing applies to loans. Be patient and compare multiple lenders' offers so you can make an informed decision.
• Know What Your Contract Says
  Pay attention: everything matters. For example, be certain that you won't be charged a fee if you pay the loan back early.
• Adjustable Rate Mortgages (ARMs) and Interest-Only Loans are not good for you
  Get a fixed rate even if it is a bit higher than one that is adjustable in the future. Remember: the future is now. What this means is that those adjustable rates will almost always go up when you can least afford them to. Lock in a fixed rate even if it is a bit more than you can afford right now. You'll be glad you did.
• Don't get fooled by fees you don't understand
  What IS a processing fee anyway? Or an underwriting fee, or a document preparation fee? A settlement fee, an express mail fee, a lender's attorney fee, an affiliate consulting fee, etc etc etc. These are what are often called "junk fees" and you shouldn't have to pay them. Or, at the very least, they should be consolidated into a single lump sum fee.

  On the other hand, certain upfront charges are legitimate and should be itemized. For example, points are upfront charges which are calculated as a percentage of the loan amount. It is part of the cost for getting credit. You should expect those fees to be itemized -- because you can deduct them from your income taxes.

  If you are paying interest from the date you close to the first day of the next month, that will show up as an interim or per diem interest charge. Escrow fees are payments collected in order that your lender can pay your property taxes and insurance costs. It is not a lender fee per se. As such, they should also be itemized separately.

In summary

Even if your credit isn't perfect, you can still qualify for a decent loan package. So do your homework and you won't get ripped off. More important than that is this: do whatever it takes to improve your credit rating, now. You'll be better off in the long run.

Ara Rubyan

For more info on home mortgage refinance, visit Ara Rubyan's Focus On Refinance blog.
Ara Rubyan is like you: a homeowner who has tried to educate himself on the full range of financial opportunities available today in these changing times.
Now, he's put all his research (so far) in one convenient location and he's sharing it with you, no strings attached. Visit his website. You'll find:

• Lots of articles on various refinance strategies;
• Videos;
• Latest news on refinancing resources;
• Your questions, answers and suggestions.

Go on over to Focus on Refinance and have a look.