Did you know carrying too much debt can lead to a poor credit score rating? Yes, it is true. If you are carrying too much debt your credit score will be impacted greatly. Especially, if you maintain high balances on your outstanding debts. Having your debt utilization close to 100 percent or over of the limit you have on your outstanding debt will result in a low credit rating.
So if you are drowning in debt, then consolidating your debt with a mortgage refinancing will help increase your credit score rating and provide overall savings in your monthly payments. But a common question as by clients is; how can you refinance your mortgage if you have bad credit? The simple answer is that it can be done, but there are a few things you need to understand first.
What is a mortgage refinance?
Refinancing your mortgage simply means breaking your first mortgage and then getting a new one. When a mortgage refinance is done for the purpose of debt consolidation, the new mortgage will be for the amount still owing on your home, plus the amount of debt that you are paying off with your mortgage. Technically, your total debt does not go down when you consolidate with a mortgage refinance but the amount of interest you have to pay does, which results in lower monthly payments and monthly savings. This will help you to be able to pay off your debt more quickly, which in turn will help to repair your credit.
How much debt can I consolidate with a mortgage refinance?
That depends on how much equity you have in your home. Your home equity is the value of your home minus how much you owe on it. Most lenders will allow you to use up to 80% of your homes appraised value when you refinance. That means if your home is worth $500,000 and you still owe $200,000, you will be able to pay off up to $160,000 with a mortgage refinance. However it 80% is not enough to help with your refinance amount then we have access to special lenders who are able to go up to 85% and even 90% of your homes appraised value. Even if that doesn’t work for you then we can look at a customizable refinance plan for you to help with consolidating your debt.
Are there any drawbacks to this?
Before you decide to pay off debt with a mortgage refinance, it is important to understand that you are guaranteeing the loan with the equity in your home. That means, if you become unable to make the payments, you risk losing your house and putting yourself in further financial stress.
If however, you can commit to making regular payments (and not taking on new debt), not only will you get out of debt faster, but you’ll be repairing your credit at the same time. There is risk – but only you can always discuss with us to understand if it is worth the risk.
How can I refinance my mortgage if I have bad credit?
The truth is that with a traditional lender like a bank or a credit union, you may not be able to. But as a Mortgage Broker in Brampton, I have access to many reputable alternative lenders that specialize in helping those with bad credit.
If you are ready to take control of your credit, getting a mortgage refinance may be the way to do that. Call me today to set up an appointment.