Using assets to restructure debt is the most viable way to improve a poor credit rating for homeowners. Mortgage loans can be refinanced at lower interest rates to consolidate debts and pay off bills by borrowing against the equity in a home. This allows borrowers to use a lower-rate loan to pay off high-interest debt.
Credit Scores
Credit scores are ranked by FICO to help lenders assess the risk of loans sought by consumers. The credit rankings range from 850 to 300, with anything more than 700 considered excellent, and any rating below 500 making it difficult to acquire a loan. The higher the rating, the better the interest rates, the lower the rating the more unfavorable the loan terms.
Refinance Options
Borrowers carrying high-interest credit card debts or car loans can improve their credit score by a refinance to consolidate those payments into one loan at a lower rate. Monthly debt payments also can be reduced by refinancing a mortgage at an adjustable interest-only rate. If payments are made promptly over the first few years, improving the borrower's credit score, the loan can be refinanced at a low fixed rate.
Lender Considerations
Lenders determine the terms of refinancing with two factors in mind: "loan to value'' and "debt to income'' ratios, which determine their risk. Loan to value is a measurement of the loan amount against home equity. The more equity held after the loan, the more favorable the terms. Debt to income measures percentage of debt against income. Higher income against low debt obligations results in better terms.
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