Pre-payment penalties may be one of the biggest obstacles to refinancing when you have bad credit. These penalties vary from state to state but the main purpose is to protect the lender from losing money when taking on higher risk mortgages.Sub prime lenders are another great alternative. Because these lenders specialize in high risk loans, they have various loan programs for individuals with poor credit. Submitting an application online is the quickest and easiest method for obtaining a quote.
One of the biggest causes of bad credit is if you are making a habit of late credit card payments. Late credit card payments are like a huge red buzzer to lenders. It alerts them that you have been irresponsible in the past with making payments, and statistically speaking, you will be irresponsible again. That makes you a serious risk to their lending institution.
Depending on the lender you may be able to buy out or buy down the prepayment
penalty. Your interest rate will usually increase when you buy out or buy down you prepayment
penalty.
In addition to pre-payment penalties lenders often charge higher interest rates for borrowers with bad credit to offset the higher risk.
Because banks charge high interest rates on loans made to homeowners with bad credit, these homeowners often have no intention of keeping the loan for more than a year or two. They plan on refinancing their mortgages to a lower rate at least once more when they have repaired their credit profile. Therefore, homeowners with bad credit often opt for Adjustable Rate Mortgages or a Hybrid Loan with a fixed interest rate for the initial 2 years followed by an adjustable rate for the remainder 28 years. These ARM's and Hybrids tend to have lower starting rates than the 30-year fixed rate mortgages.
Bad credit refinancing may help some borrowers improve their credit rating if the money from loan proceeds are used to pay off debts. This can improve monthly cash flow helping them make all monthly payments on time.
