Mailbag Monday: Refinancing After Bankruptcy
I would like to refinance my home. The balance is $19,000 and my current interest rate is 9% with six years remaining. I filed bankruptcy nearly ten years ago, reaffirmed my mortgage, and payment has never been missed or late. Question: Should I wait to refinance until the bankruptcy note on my credit report drops off?
— Karen
This is admittedly tough – but not for the reasons you think. Bankruptcy remains on your credit report for up to ten years — Chapter 7 will hang around for the full ten; Chapter 13, which involves paying at least some of your debt back, will drop off a bit sooner at seven years. It sounds like you have a Chapter 7 filing on your record.
If it were just about the bankruptcy, I would tell you to wait until it clears off your report, and then try to refinance because you’ll likely get a better interest rate — even though rates are headed up. But your loan’s balance and short remaining term has me concerned about this refinance in general – first of all, I want you to take a look at the amortization schedule, because it’s very likely that you’re not paying much interest at all any longer; the majority of your payments are probably comprised of principal at this point, so refinancing won’t do you much good. In fact, it could end up costing you more money, because you’re unlikely to find a loan with a term shorter than 10 years, which will stretch out your payments. On top of that, you’re likely to struggle to find lenders who will take on this loan — many won’t bother with less than $100,000, and those that do may tack on additional points to your interest rate or fees to the loan. So you’ll certainly want to shop around.
If you’re interested in saving money by bringing that 9% rate down — instead of freeing up cash flow — I would just throw additional cash at your mortgage each month. Send an extra $50 or $100 with your payment. Doing so will cut down on the amount of interest you pay, which is the same as lowering your interest rate. And you won’t have to deal with the hassle or the fees that come with a refinance — it’s a win, win.
