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Below is a recent question we received from a homeowner considering refinancing with a credit score in the low 500's, and our response.

Dear Star Loan Services,
I am in need of help, fast!  I am in the middle of refinancing my mortgages. My husband and I have about $60,000 in credit card debt, $35,000 in equity line and our main mortgage is $175,000.

Our credit is very poor and about two years ago we visited a credit repair agency to help us develop a financial strategy for manage debt better and controlling finances. However, our credit score is still in the 500s. Nonetheless, we were able to locate a lender that has offered to refinance our loans and also give us cash back so that we can pay all of debts off.


Is refinancing a smart decision? It seems like we will save money as a result of the 2-year adjustable rate mortgage at 9.1 percent. However, we will only be able to pay off all of our debts in four years, not two.

Shelia Jackson
LaJolla, California

Our answer:
What is going to happen in two years, once the ARM expires? The interest rate on your ARM is likely going to increase significantly. And, only if you have been managing money wisely and begin paying all of your bills on time, you still will not have a good enough credit rating for refinancing into something more controllable.

However, if you can get everything paid off by refinancing and then begin contributing your 'savings' each month toward paying down that mortgage as quick as possible, refinancing can be a good idea.

However, when refinancing with poor credit, it is important that you utilize a reputable lender that is going to report your on-time payments to all three major credit reporting agencies. This will help improve credit scores. If they neglect to do this, at the conclusion of your loan, you will likely still have a bad credit score.


In addition, you'll need to determine if your loan is going to have any sort of pre-payment penalty associated with it, and for how long. Will you be able to refinance without having to pay a significant penalty if you decide to sell your home? What sort of fees and closing costs are associated with the loan? High fees can result in more problems.

Before committing to any loan, please contact us so that we can determine if the offer being presented to you makes sense for your situation. Also, we invite you fill out a free, no obligation application for refinancing, without having your credit checked!

Also, it appears as though you are in over your head in debt. We work with a nationwide network of credit counselors that will help you regain control of your finances and help you prevent future incidences of debt from occurring. Submit a free request for consumer credit counseling here. There is no harm in hearing what we can do for you!

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