If you have a low FICO score due to recent bankruptcy or for other reasons, tapping into your home equity could provide you with the lowest possible interest rate for consolidating credit card debt and other loans you may have, including a home equity loan (second mortgage). Bad credit debt consolidation loans and mortgage refinancing at least a few extra percent on the interest rate–sometimes as much as 5% more. The fees are higher, and chances are there are more of them. But, the rates are probably better than credit card and other loan rates.
Your current mortgage terms and interest rate, the length of time you intend to stay in your home, and the level of debt your currently have are all factors to be considered in making any mortgage refinance decisions. Bankrate indicates that the general rule is that when the interest rate on your mortgage is at least two percentage points higher than the current market rate, you may want to consider refinancing. And, most experts believe that it takes at least three years to get the full advantage of the savings from a lower mortgage rate, especially a fixed mortgage rate, so you may not want to refinance if you plan on moving in a year or two.
Your poor credit also has to be factored into your mortgage refinancing decision. For example, you can refinance right after a bankruptcy. But, it’s not a good idea because you can expect rates to be 10% or higher. It’s best to wait until you’ve rebuilt your credit before considering a mortgage refinance. If you make your payments on time for your existing credit, your credit scores could be in the 600s about 2 years after your bankruptcy. Then, you’ll get near conventional rates. However, even if your credit scores are low, you may still be able to get approved for a mortgage refinance. If you are turned down, work on rebuilding your credit and apply again a few months later.
Once you’ve established a good credit history for three years, you may want consider refinancing again for a better rate. Making regular payments, building cash reserves, and lowering your debt will allow you to qualify for lower interest rates in the future.