Home > Mortgage Loans > Does Bad Credit Mean Higher Interest Rate?
Does Bad Credit Mean Higher Interest Rate? |
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If you have bad credit and are in need of a loan, you might consider going in for a bad credit loan on mortgage, which typically has an introductory interest rate that is fixed for 2-3 years and is much higher than the interest rate on a conventional 30-year fixed rate loan. However, this interest rate on a bad credit loan on mortgage adjusts periodically after the initial period. People with bad credit are more prone to default in monthly payments than those who have excellent credit. It is for this reason and to compensate for the extra risk involved that lenders charge higher interest rates on the loan. On the other hand, people avail of a bad credit loan on mortgage with the intention of improving their credit score. If monthly loan payments are made on time for two consecutive years, bad credit loan on mortgage can be refinanced with a conventional loan which has a much lower interest rate. If you have good credit, you fall into the category of prime borrowers as you have credit and, in all probability, will be able to make your monthly payments on time. This also encourages lenders to lend money as you are viewed as a responsible consumer. On the other hand, people with poor credit were routinely denied loan in the past. However, nowadays people with damaged credit can get bad credit loan on mortgage, but with a higher-than-average interest rate. Apart from the high interest rate, lenders can also charge more fees for a bad credit loan on mortgage than for a conventional home loan. These can range from 1%-6% of the loan amount. Lenders feel that people with bad credit, after having been denied loans so many times, are grateful that they can get into their own home and so they do not complain about high interest rates and fees. It is not illegal to lend money at a higher-than-average interest rate to someone with poor credit, although some states cap loan rates to prevent usurious (unfair) interest rates. Under the Federal Truth in Lending Act, lenders must inform applicants in advance about all terms and costs of bad credit loan on mortgage, including the annual percentage rate (APR). If you have signed a refinancing, home equity or second home loan contract to refinance your home, federal laws give you three days to reconsider your decision and cancel the deal. This is called your right of rescission. You must also receive full refund of any money you paid within 20 days of canceling. If your bad credit loan on mortgage is a high rate, high fee loan refinancing, home equity loan or second mortgage, additional protections are offered by federal laws. These laws stipulate that the interest on loans covered under them must be at least 10 percentage points higher than the rates on Treasury securities of the same maturity. A bad credit loan on mortgage would necessarily attract a rate of 15.17% or higher if the rate on a Treasury Security is 5.17%. Although the interest rate on a bad credit loan on mortgage is higher, as the customers have a poor financial history and lenders are more vigilant regarding the account, bad credit loan on mortgage can help refinance your home if the mortgage is handled with good faith. Lenders expect higher returns from borrowers of bad credit loan on mortgage and impose higher interest rates and larger monthly payments because of the high risk involved. Many lenders offer reasonable down payment and higher interest rate and sometimes repayments are also relaxed. Many people feel that at least they are able to get finance for their dream home with bad credit loan on mortgage and do not mind paying a high interest rate. In any case this high rate is not meant to cheat customers but is more of collateral for the lender. |
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