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SkyStillSunny

Refinance - should I pay off collections?

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Hi there,

I am trying to refinance my home mortgage, and have about 50% equity on it. But my credit score is bad. It's probably around 620. I have a lot of charge-offs, but notably 2 collection accounts that amount to about 3k. Some of the lenders I've called, when telling them this up front, said that I should pay off the collections, or that the banks might force me to pay off the collections accounts.

Is this accurate information? Everything I read says NOT to pay them off, that it will reset the clock if I try to call them to negotiate. Plus, will it even improve my credit score?

Any advice is appreciated! Thank you.

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2 hours ago, SkyStillSunny said:

Plus, will it even improve my credit score?

No, but....

2 hours ago, SkyStillSunny said:

the banks might force me to pay off the collections accounts.

...this is true. The reason is banks don't want your judgment creditors putting liens on their security (the home). With my first mortgage i offered an affidavit that stated the judgment i had was beyond the collection SOL and would never be a problem for the lender. This was back in 2007 right before the RE market started to implode, and probably wouldn't fly these days. 

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MOST of the time you will have to pay off the accounts in collection.

Realize, there are exceptions for everything.

A little over a year ago, my wife and I refinanced our home.  She had an account Vz had sold to a JDB, for about $600-700.  It was close to the SOL.  

I talked to lenders, and none of them required us to pay off the debt.  One lender suggested we attempt a Pay For Delete.  We contacted PRA with a PFD offer, but they never responded.  We wound up paying nothing, and getting the loan anyway.  

 

If you are already contacting banks, and being told you need to pay off the debts in collection, then you have two choices:

1. Pay off the loans in collection, get whatever terms you can get with a 620 credit score.  Not great, but not bad.  

2. Wait until the SOL has passed, and your credit score is higher, then refinance the mortgage under whatever terms you will be able to get in a few years.  

 

I basically did #2, because I had over $100k in charged-off debts, plus a foreclosure on my record.  But you only have about $3k.  

The question is: are the benefits you can get with a refi now, rather than past the SOL, with a 620 credit score worth paying off $3k?  

Answer that question, and you will know exactly what to do.  

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Thank you guys. That's good advice. I think I'll apply, and determine if it's worth it. Right now my mortgage is ridiculously high, and I feel like I could get it down more than $500/month with a refi. I could easily pay off the 3k in collections at that point. Only problem is that although I have 2 collections, I still have several other charge-offs, that maybe one day a JDB could try to collect on? I still have about 2-3 years before SOL is reached on my accounts.

The lender also mentioned that in some cases I could use the money in the refi to go ahead and pay off the collections so I wouldn't have to even pay any money up front for that. Would that be such a terrible idea?

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4 hours ago, SkyStillSunny said:
 

Thank you guys. That's good advice. I think I'll apply, and determine if it's worth it. Right now my mortgage is ridiculously high, and I feel like I could get it down more than $500/month with a refi. I could easily pay off the 3k in collections at that point. Only problem is that although I have 2 collections, I still have several other charge-offs, that maybe one day a JDB could try to collect on? I still have about 2-3 years before SOL is reached on my accounts.

The lender also mentioned that in some cases I could use the money in the refi to go ahead and pay off the collections so I wouldn't have to even pay any money up front for that. Would that be such a terrible idea?

That is something some people do.  They refi for a higher amount, and a portion of the money is used to pay off the debts.  

In that case, you won't be saving $500 a month, because your principal will be higher.  

OTOH, you could find yourself in a situation in which the loans are paid off AND you are paying less money per month than you are now.  No fear of ever getting sued, and a clean credit rating.  

The other side of it is, you would have a higher principal on your mortgage.  AND, if you refi on a 30 year term, it will take you longer to pay it off.

 

What I did -- I realized I could refi for a 15 year mortgage for less money per month than the 30 year mortgage I was in.  I had over 15 years left on my mortgage.  I am not saving very much $ per month, especially since the refi costs added thousands of dollars to my principal.  But, I am saving a little bit of money per month, and I will pay off my mortgage a few years earlier.  Maybe only about 2 or 3 years earlier, but when my mortgage is all paid off, I will certainly appreciate those 2-3 years.  

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I appreciate the response. It's helped me crunch the numbers and figure out what's best for my family. I went ahead and applied for the refinance, and it turns out I don't actually have to pay off my 2 collection accounts, so that was good. I was approved for an FHA at 4%, which based on my credit I guess is pretty good. I had a 627 Experian, 612 Transunion, and 650 Equifax. It turns out the refi is actually saving me even more than $500/month. Hopefully the rest of the process goes smoothly!

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18 hours ago, SkyStillSunny said:

I appreciate the response. It's helped me crunch the numbers and figure out what's best for my family. I went ahead and applied for the refinance, and it turns out I don't actually have to pay off my 2 collection accounts, so that was good. I was approved for an FHA at 4%, which based on my credit I guess is pretty good. I had a 627 Experian, 612 Transunion, and 650 Equifax. It turns out the refi is actually saving me even more than $500/month. Hopefully the rest of the process goes smoothly!

That’s great!

And if these old debts come back to haunt you before the SOL, you now have money to deal with them.  If they don’t, even better!

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It is a good idea to pay them off. I thought that I did it and I was not worrying about it, but it was not that easy. There was some problem with my credit card and I could not make it work. I remember being really mad and even calling my bank for help. After that I got mad and decided to use a different payment system. I started researching them and I was lucky to find baxity. On their website you can find everything there is to know about best payment services and you can choose one of them. I have chosen skrill and you can register for account very easily by following their instructions. It was like finding gold for me because since I have been using that I really had no issues with my payments.

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