Refinancing with a Low Credit Score
Q: Can I refinance my mortgage if I have a low credit score?
A: The question is not “Can you?”, but “Should you?” Just because a lender will approve your loan with a low credit score doesn’t mean refinancing is a smart decision.
If you want to refinance in order to lower your monthly payment, and if your credit is worse now than when you first got your mortgage, it may be difficult for you save any money by refinancing, since the better rates are usually reserved for those with better credit.
However, if you are really in a difficult situation, it may still be possible to lower your monthly payment by extending the term of your mortgage, say from 30 years to 40 years. A good first step is to talk to a mortgage specialist and have them run some scenarios for you. Be upfront about your credit situation. This will give you a good idea what kind of interest rates and monthly payments you can expect, and whether or not it’s worth it to refinance.
If you find you cannot lower your payment by refinancing, take a close look at your budget and monthly spending and see where else you can cut. If your credit situation is a result of bad financial habits like consistently missed payments and high consumer debt, get your financial house in order. You’ve just seen how bad credit can limit your options.
On the other hand, if you want to refinance in order to cash out some equity and pay off high-interest debts as a step to improving your credit, cash-out refinancing may be a smart decision. You may still pay a higher interest rate than your peers with better credit, but as a part of an overall debt repayment and credit repair plan, it may be worth it.
Again, though, it’s important to commit to your financial plan. Cash-out refinancing can be a smart way to pay off high-interest debt, but it also raises the stakes: if you miss your mortgage payments, you could lose your home.
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