In the United States, Bankruptcy is used as a last resort when a borrower is unable to pay back their creditors. There are several different types of bankruptcy, but most people either declare Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. Chapter 7 Bankruptcy, which is most often used, focuses on the liquidation of the debtors assets. Chapter 13 Bankruptcy, on the other hand, deals more with the reorganization of the debt. However, with both of these types of bankruptcy, the debtor can usually retain some of their property.
While in some cases, bankruptcy is the only option, it can have a very negative affect on a persons credit rating. Typically, for the next 7 to 10 years, the individual will have a very low credit score, which makes borrowing money very difficult.
This article discusses how to refinance a home after bankruptcy, although the information provided can also be applied to anyone who wishes to refinance their home. Even though many types of loans, like a new car loan, can be very hard for someone who has declared bankruptcy to get, refinancing a home is often not viewed as a large risk by mortgage lenders. So, even if you have declared bankruptcy, it is usually possible to refinance your mortgage.
Most people decide to refinance their mortgage in an effort to get a lower interest rate and a lower monthly payment. In the case of someone who has filed bankruptcy, it is not uncommon to have a subprime mortgage, which can have excessive rate increases, higher interest rates, and unfavorable terms. As a result, refinancing your home can often be the best way to save money and stay in your home.
It is important to note, however, that when you refinance your home, you are basically starting from scratch with your new lender. Over the course of the first few years of a mortgage, you are primarily paying the interest of the loan. Over time, the amount of interest you are paying will decrease, while the amount that you are paying towards the principal will increase.
As an example, lets consider a home that costs $200,000. In the first three years of your mortgage, you might pay $50,000 to your lender, but only $3,000 goes towards the cost of the home. So, after 3 years, you would still owe $197,000 towards the home. Over the next three years, you may pay $9,000 towards the principal and as time goes on, the amount that goes towards principal increases. If you were to refinance your home after only 3 years, you would be refinancing it for basically the full amount, even though you have paid your lender $50,000.
This is important to remember, because a big part of refinancing your home involves determining whether it is in your best interests to do it in the first place.
The first step when preparing to refinance your home should be to begin setting aside some money every month. When you refinance a mortgage, you will usually have to pay a number of different fees, including an application fee and a loan origination fee.
These fees are often called junk fees, because they do not actually go towards the mortgage itself or the value of the home. In many cases, junk fees can cost several thousand dollars, so it is a good idea begin saving money as early as possible.
It is also important to determine if your current mortgage has a penalty for paying the mortgage off early. Some mortgages, especially subprime mortgages, have a pre-payment penalty, which goes into affect if you pay your home off early. If this is the case, you will need to take this into account.
Before you begin shopping around for a new mortgage, it is also very important to analyze your monthly expenses and compare these with your monthly income. This is important because you need to get an idea of what type of monthly mortgage payment you can afford.
It is important to take into account all of your monthly expenses, including utilities, phone bills, car payments, food, and any other living expenses you may have. Also, make sure that you include any outstanding debt, such as credit card bills, as well as emergency bills that may occur.
Getting an idea of the current mortgage rates is essential, even if you have poor credit or have filed bankruptcy. You can use these figures to help decide whether a particular lender is offering you a fair interest rate or if they are offering a subprime mortgage.
Begin by calling around to several of your local banks to find out what the current mortgage rates are. At this time, don’t mention the details of your situation, but simply inquire as to what the current mortgage rate is. It is also a good idea to consult some online lenders as well, who usually have their basic interest rates posted on their website.
Once you have an idea of the current mortgage rates, you can start to get estimates for refinancing your home, as a number of lenders to provide a pre-qualification letter with their rates. The lender will ask you for your financial information, but they should not actually run your credit or charge you any fees for the written estimate.
At this point, it is imperative that you are upfront and honest with the lender. Lying about your bankruptcy or your credit score, might get a higher estimate, but when they actually run your credit, they will find out you were lying and will not offer you the same rate. In the end, you are only wasting your own time, as well as that of your lender, which can often disqualify you from receiving the loan anyway. Instead, honestly answer their questions about your income and bring up the fact that you have filed for bankruptcy.
Make sure that you also ask about the cost of refinancing your mortgage, such as attorney fees, application fees, and any other charges that the lender might have.
It is a good idea to check the rates of a multiple lenders, so you can explore all of your options.
Once you have a number of estimates, you can begin comparing the different loans to find the one that best fits your needs. Start by comparing the interest rates offered to the standard interest rates that you found in step 3. This will give you an idea of whether the interest rate is normal or if it is subprime.
Next, compare the cost of refinancing your home against the cost of keeping your existing mortgage. It is essential not just consider the difference between the monthly payments, but also the cost of the junk fees and any pre-payment penalties associated with your current mortgage. For instance, if your monthly payment is $100 less on the new mortgage, but you have to pay $3,000 in junk fees, then it would take you almost 3 years before you break even on the mortgage. Remember, that the junk fees are due at the time of signing.
It is also important to look at the big picture. An amortization table can be very handy, which will break down every payment over the course of the loan to show you how much of it is going towards interest and how much towards principal. It is important to compare where you are with your current loan and where you would be if you refinanced your mortgage.
After you have carefully considered all of your options and decided upon a lender, it is a good idea to try to get your lender to reduce the junk fees. These fees can often be reduced with a little negotiation and are often padded just for this reason.
While refinancing your home can be a great way to reduce monthly payments or get out of a subprime loan, it is not a decision that should be taken lightly, especially for those who have filed bankruptcy. Instead, it is important to make sure that refinancing your home is really in your best interest and not just think about the difference in monthly payments.