 Refinancing with a bad credit score
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 Dear
Dr. Don,
We are in our last year of a 3/1 ARM 5.75 percent conventional loan.
The ARM was the best choice at the time because of our low credit
score. We refinanced to this from a fixed-rate loan to do some home
renovations. The original fixed-rate loan was an 8.75 percent FHA
loan.
Our credit score is not much better now. We were trying to repair our damaged credit in the past three years. However we had two job changes that prevented us from catching up.
Our credit scores are around 529 with unpaid credit
cards we are still working on. What do we do now that the initial
rate is about to end?
Thanks,
-- Ann Adjustment
 Dear
Ann,
If I were in your position, I would stay in the existing mortgage
until I could bring up my credit score and take my chances on refinancing
at a better interest rate after I got my credit under control. According
to myFICO.com, a credit score of 529 would currently qualify you
for a fixed-rate mortgage at an interest rate a little over 11 percent.
You should figure out what the fully-indexed rate
on your existing adjustable mortgage will be when the 5.75 percent
rate ends. The interest rate on an adjustable-rate mortgage (ARM)
is reset at a spread to the current value of an interest rate or
interest-rate index. You can follow the changes in your index using
Bankrate's Rate Watch feature.
Your loan might have caps on how much the interest rate can increase
in a year and over the lifetime of the loan. If you can't figure
it out from the loan documents, talk to your lender.
Get current and stay current on your credit cards.
Make every loan payment on time. Pay down the credit card balances
the best you can. These steps will help you improve your credit
history and by doing that your credit score. While mortgage interest
rates are trending higher, especially ARMs, there are no bargains
to be had in refinancing now when your credit scores are this low.
To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."
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