Declaring bankruptcy is scary. You may be exploring any alternatives you have to save your home. Refinancing to avoid bankruptcy in Maryland may seem like a great idea. But if you’re behind on your mortgage, chances are your credit score has already taken a dramatic hit. That means you may not be approved for a refinance.
Lenders may also consider other factors when you request a refinance, such as:
- Your debt-to-income ratio
- Outstanding liens
- Outstanding judgments
- Household income
And, if you are approved, getting a refinance to avoid bankruptcy in Maryland will not help if you have other debts, such as medical bills, unless you qualify for a cash-out refinance, which will drastically increase the value of your home loan in the long run.
To learn more about whether or not it is the best option to refinance to avoid bankruptcy in Maryland, read on.
What is a Refinance?
A refinance means that your new lender pays off your old home loan and gives you a new loan. This loan will have a new interest rate and terms. For example, if you have a loan for $300,000 with a 4% interest rate and are behind $10,000.00, a refinance may allow you to roll the $10,000.00 into a new loan with a different lender.
A refinance is different from a loan modification, which is a change to the terms of your existing loan. When pursuing a refinance to avoid bankruptcy in Maryland, you are getting a new loan with a new lender. However, your monthly payment will probably go up because the interest rate will change. The principal balance on your loan-the amount of money you’re borrowing from your lender-will also typically increase. You will also have to pay closing costs, which can add up to thousands of dollars.
What Are The Requirements to Refinance?
In order to get a refinance, you generally need to be current on your mortgage. Some lenders also require proof that you will be able to continue making payments. If you cannot prove you can make loan payments on time, it is unlikely that your lender will let you refinance.
There are also additional requirements to refinance to avoid bankruptcy in Maryland, depending on the kind of loan that you have.
Streamline Refinance for FHA and VA Loans
If you have an FHA, VA, or USDA home loan, you may be eligible for a “streamline refinance.” With a streamline refinance, you may be able to refinance your mortgage without going through an appraisal. Sometimes you can do this without even undergoing a credit check or proof of income. It is possible to get a streamline refinance for government-backed home loans, such as those issued by the FHA, VA, or USDA, but not conventional mortgages. You are simply refinancing from one type of mortgage to another.
For example, an FHA loan would be refinanced into another FHA loan. Refinancing with the same lender you used for your initial mortgage is an option, but it is not required. You can shop around for the lender with the lowest rates and fees.
Conventional Cash-Out Refinance
Getting a cash-out refinance will replace your existing home loan with a new, larger mortgage loan. A cash-out refinance lets you tap into the equity of your home and use the money for whatever you need. The difference between your new loan and old loan amounts is given to you as cash after closing. This lets you access a substantial sum of money at a lower interest rate.
Some upsides of a conventional cash-out refinance include:
- You can often cash out for about 80% of your home equity
- It gives you some leeway if you need fast cash for other expenses
- Cash-out refinancing is a better way to finance larger expenses because mortgage rates are lower than personal loan or credit card rates
Some downsides of a conventional cash-out refinance include:
- Credit checks-if you have bad credit or a lot of debt, you are unlikely to qualify
- Possible inspections of your debt-to-income ratio
- The new loan will be much larger than your old one, meaning you will have to pay more in the long run and your monthly payment may be higher.
What Are the Downsides of Refinancing?
Refinancing may seem like an attractive option, but if you refinance to avoid bankruptcy in Maryland, you may end up with:
- A much higher monthly mortgage payment
- Costly closing fees
- A much higher interest rate
In the end, you will be paying more overall if you decide to refinance to avoid bankruptcy in Maryland.
Should You Refinance to Avoid Bankruptcy in Maryland? Or is Chapter 13 a better option?
Chapter 13 bankruptcy may be a better option than refinancing, especially if you have other outstanding debts, such as medical bills.
With chapter 13 bankruptcy, you can:
- Avoid closing costs;
- Avoid potentially higher interest rates and keep the terms of your existing loan;
- Stop your home from being foreclosed on.
In addition, you may not be able to refinance at all, if you have other debts or a pending foreclosure sale.
Whether you are behind on your mortgage and fear that foreclosure is coming, have received a notice of intent to foreclose, or have gotten a notice of impending foreclosure sale, you do have options. The sooner that you take action, the more options are available to you.
If you are afraid to lose your home or you have questions about refinancing or chapter 13 bankruptcy, schedule a free consultation with the Maryland Bankruptcy Attorneys at Steiner Law Group or call (410) 670-7060.