It’s Christmas Eve, and bad credit should not stop anyone from getting a refinance or second mortgage. In fact it is a good reason to get one.
The fear of paying very high interests is one of the reasons borrowers dodge the idea of getting a home loan. Those who have gone through a foreclosure or bankruptcy are one of those people who think that a tanked credit will make them pay more than a borrower who has stellar credit, but that’s not really true.
Here are some of the most practical reasons why a borrower with a dismal credit should apply for a home loan:
1. Indication of your Creditworthiness
An entry in your credit report saying that you qualified for a home loan is a positive indication of your creditworthiness. If lenders are confident enough of granting you a substantial amount of loan spread over a long period of time, then there is no reason why they should not approve your credit card or short term loan applications. The record of your bankruptcy can stay up to 5 years in your credit file, unless you do some legal measures to correct it. So, the moment you obtain a home loan, lenders may ignore the ding in your report and qualify you for loans with better rates.
2. It can improve your bad credit
Along with showing steady employment and earning a regular salary, some of the best ways to improve your financial standing is by boosting your credit score. It will qualify you for low-interest credit cards, and short-term loans, and you may even have better chances of getting a better employment or better business propositions with an impressive credit.
Home loans also improve your credit score. By applying for a home loan, you can push up your credit score as it adds an installment type of loan into your credit mix. You can also use the proceeds of your refinance or home equity loan to consolidate your debts. Consequently, your credit score would go up as your overall credit utilization rate lowers, and your balances on existing loans go down.
3. It reduces the amortisation rate
Now, you have to be careful when borrowing against the equity of your home. Make sure that the new rate reduces your monthly payment. The monthly payment schedule must also be low enough to offset the costs of the home loan.
Whether you opt for a cash-out refinance or not, it can really save you more money if you stick to the remaining mortgage term. Extend it only when you think doing it would be more beneficial for you, in terms of monthly expenses. While there is nothing wrong in extending it to 30 years, especially if you are still young and you need the extra money to pay for your monthly expenditures; you can save a huge amount of money if you shorten it a bit.
4. Pay for more profitable or rewarding endeavours
You can use the equity you built in your home to pay for more profitable or rewarding endeavors. A home loan is a good financial tool that you can use to fund your retirement, invest in mutual funds, or stocks, or engage in a profitable business. The revenues will be far higher than the savings you can make if you don’t get a loan. But, always remember that you are using your home as collateral. So, make smart choices by getting a loan for the right reasons.
When making a decision as to whether you should refinance or not ask yourself if the reason is worth the cost of a larger mortgage. Make use that using the money will have a positive effect on your net worth. If not, at least it should be worth the extra amount of money you will lose on payments over the loan period.
Example
Let’s say, you have a great business idea, a sound business plan and a business strategy that could increase your current income by more than 50%. Since you cannot access traditional business loans, you decided to take out a home equity loan. Now, try to create a profit projection and compare it with the monthly installments and overall cost of the loan. If you will earn more than what you will pay on your monthly installments, even at your slowest sales period, you can be confident that the loan will be put to good use.
Another example is when you have been paying multiple high interest credit cards, short-term loans, salary loans and medical bills. You can use your home equity to consolidate your debts, thereby reducing the overall interest and total cost of all those debts combined. It will not only give you more savings, but it can improve your bad credit standing.
