Refinancing a Home After Filing for Bankruptcy

Bankruptcy is a tool that is used in the United States when a borrower is unable to repay their debts. In most cases it should only be used once all other options, such as speaking directly with a creditor, have failed, because bankruptcy will have a very negative impact on your credit rating for seven to ten years.

In the United States, most individuals file Chapter 7 Bankruptcy, which involves the liquidation of their assets, although Chapter 13, which involves reorganization of debt, is also common. Under both of these types of bankruptcy, the borrower is allowed to retain some of their essential property, so it is not uncommon for someone who has declared bankruptcy to be allowed to keep their current home mortgage. It is also not uncommon for this to be an unfavorable or subprime loan, so many who have declared bankruptcy will wish to refinance their home.

Refinancing a home after bankruptcy is not impossible, although it is more difficult. However, most lenders do not view someone with an existing mortgage to be as big of a risk, so this can work in your favor.

While this article discusses bankruptcy, the lessons learned can and should be applied to anyone who wishes to refinance a home.

Before discussing how to refinance a home, it is important to understand how refinancing a home works. This is because refinancing a home is a big decision, which if not done carefully can have a very negative impact on your personal finances.

When you purchase a home using a mortgage, you start by paying the interest on the loan. Each month, the majority of your payment goes towards interest, with only a little bit going towards the principal of the loan. It usually takes at least 5 years before you begin to significantly pay down the principal of the mortgage.

As an example, consider a $150,000 home. Over the course of the first three years, you might pay your lender $50,000, but only $3,000 of this will go towards the principal. So, after three years, you would still owe the bank $147,000.

If you decide to refinance your home at this point, you are basically refinancing it at its original value. Unless you are trying to get out of a subprime mortgage, refinancing is not always in your best interest, because over the next three years, you would begin to start paying more down towards the principal. However, if you refinance, you will basically reset your loan and begin paying interest again.

Before you begin to look research refinancing your home, it is important to start saving some money. You will have to pay a number of fees, such as an application fee and attorney fee, when you refinance your home. These fees, which are typically referred to as junk fees, can often cost a few thousand dollars.

If you decide not to refinance your home, you can always put this money towards the principal of your mortgage, so saving money is a win-win situation.

Evaluating your personal finances is an essential step whether you are buying a new home or refinancing your current home. Begin by calculating your monthly expenses, with the exception of your mortgage payment. Take into account all of your expenses, including utility bills, outstanding debt, car payments, food, and discretionary expenses. It is also important to do some emergency planning and include any expected home renovations that you might need to do. This is much easier if you have been living in the home for awhile, because you will know what to expect.

Once you have tallied all of your expenses, subtract these from your monthly income. The money left over will give you an idea of what type of monthly mortgage payment you can reasonably afford.

After you have evaluated yourself, you can begin to evaluate potential lenders. First, however, start by finding out the going mortgage rates for a traditional mortgage. You can use these interest rates as a benchmark to compare against prospective lenders.

Next, start calling around to lenders to get an estimate on refinancing your mortgage. If you are still on good terms with your current lender, this can be a good place to start. You can ask for a pre-qualification letter, which will provide an estimate based upon the income figures you provide to the lenders.

If you have declared bankruptcy, make sure you mention this to the lender as well as your credit rating and any debt you may have. It is important to be honest here, because lying might get you a better estimate, but when they find out you lied, and they will, the lender will not honor the estimate.

Once you have collected a number of estimates, you can begin evaluating them to see if they fit your needs. The first step should be to compare them against standard interest rates, so you have an idea of whether they are normal or subprime.

Next, you can compare the mortgage against your current home loan. It is important to not only focus on how much the monthly payment would be, but also on the junk fees associated with refinancing your loan and any pre-payment fees your current mortgage might have. Often, you may find that when you consider the junk fees, it can take several years for refinancing a home to pay off for it self.

For instance, if your new mortgage payment saves you $50 a month, but has $2,000 in junk fees, then it would take you over 3 years to break even on the loan. So, just because the monthly payment is lower, does not mean the mortgage is a good deal.

It is also imperative that you consider how much interest you have already paid into your current home. If you are at the point where you are finally starting to pay more principal than interest, it may be worthwhile to keep your existing mortgage a little longer, so you can pay down your principal some more. This will in turn help you get a lower rate when you do decide to refinance your home.

An amortization table is a very handy tool for this, which will print all of your payments on a loan and show you how much of the payment is going towards the interest and how much is going towards the principal of the loan. Most banks can provide you with an amortization table and there are many websites that have free mortgage interest calculators, which will also include an amortization table.

After you have carefully considered all of your options, including keeping your existing mortgage, and made a decision on which loan will best fit your requirements, it is important to try to negotiate the junk fees. Junk fees get their name because they do not go towards the principal of the home or any of the interest on the loan. Instead, they are payments made to the lender or broker and as such can often be negotiated for a lower fee.