Home equity loans are another way of saying “second mortgage.” It’s when homeowners borrow finances based on the equity of their homes. This loan became very popular in 1996 because it kind of circumvented the year’s tax returns. This led to an erasure of deductions on the interests on many purchases. Thanks to the home equity loan, borrowers may take out up to $100,000 while still deducting all the interest while filing their taxes. This article will go over both the benefits and negatives of a home equity loan.
The Two Different Types of Home Equity Loans
A home equity loan will come in one of two ways:
1. Fixed Rate Loans:
Fixed rate loans offer one payment for the borrower. This is paid back over a time that is set, and at an interest rate that was agreed upon by the borrower and lender. The payments and interest rates are continually the same for as long as the loan lasts.
2. Home Equity as a Line of Credit:
When a borrower chooses to do a home equity as a line of credit, he/she agrees upon a loan in which the rate varies. It works a lot like a credit card. Sometimes it even comes with a card. Borrowers must be pre-approved with a particular spending limit. Then they can withdraw any money they need through a card or a special kind of check. The monthly payments will vary depending on the money used and the interest rate at the time. Just like the fixed rate loans, a home equity lines as a line of credit have a set time to be paid back. If it is not paid in full by the commencement of the time offered, the rest must be paid back all at once.
Benefits for the Consumers
- Lower interest than that on other loans and cards, though higher than the first mortgage’s.
- The interest is tax-deductible.
- You can use your home equity loan for paying off your other loans and credit cards.
In the end, by taking care of all their debts with a home equity loan, borrowers end up with one payment with low interest rates and with tax benefits.
Benefits for the Lenders
- They earn fees and interest from two mortgages instead of one.
- If a borrower fails to pay back the loan, the lender keeps all the money that was earned on both mortgages.
- The lender can also repossess the home, re-sell it, and continue on with another borrower.
Use a Home Equity Loan the Right Ways
Home equity loans are a great idea for borrowers who are responsible. As long as you receive a steady and reliable income and you know that you’ll be capable of paying back the loan, it is a great alternative to other loans because of its tax deductions and low interest rates. Fixed rate home equity loans could help to cover a single, rather large purchase. Like a sudden medical bill or new siding on the house. The home equity line of credit offers a very good way to pay for short-term but recurring costs, like the tuition for a four year degree in a university.
On Recognizing Pitfalls
One of the biggest problems with home equity loans is, they could possibly help a borrower that has fallen into the pattern of borrowing, spending, borrowing, and spending, sinking further and further into debt. Sadly, this is such a common issue that they have named it: reloading. Reloading is pretty much when the borrower has made it a habit to take out a loan to pay a debt and open up more credit for the borrower to spend.
- Reloading sends the borrower into a huge pit of debt that usually makes the borrower turn to home equity loans at an amount up to 125% of what is valued in the borrower’s home. This kind of home equity loan has greater fees because, since the borrower took out more than his/her home is worth, then the loan doesn’t have any security. There is no collateral. Also, the interest on the part of the loan that is more than the worth of the house isn’t tax deductible.
- Another issue borrowers face is when they take out a home equity loan for home improvements. Remodeling the living room or bedroom certainly adds values to the house. But improvements like a pool could not be as valuable to the market as the homeowner for reselling. A piece of advice? If you want to add big changes to your home badly enough that you go into debt, consider whether they will add at least enough value to your home to cover the cost or not.
- A final, popular reason that people take out home equity loans is to pay for a child’s college education. However, if you are close to retirement, the loan may negatively affect your ability to complete all your other goals. A better idea would to find another way to pay for the child’s college education.
How to Get a Home Equity Loan with Bad Credit
This article gives a few tips about getting a home equity loan with bad credit. A good way to determine if you have good or bad credit is by using the credit score 660. If your score is below that, you will have a hard time getting a loan. If this is the case, keep reading for tips on how to get a home equity loan with bad credit.
Specialized Lenders and Getting a Home Equity Loan with Bad Credit
If your credit score is under 660, it’ll be difficult trying to get a loan from mainstream loan companies like Wells Fargo, Citi, Chase, or Bank of America. Instead, you should look into organizations that specialize in helping people with low credit scores. The only problem with these organizations is that they have high interest rates on their loans. Your credit score is what a lender uses to determine how risky or not giving you a loan is going to be. Will you pay your dues? The lower the credit score, the more risky it is, the higher they’ll charge you. However, if you still really want a home, this is probably the only road you have to get a home equity loan with bad credit.
A lot of people think that filing bankruptcy ruins your chances of getting a home equity loan. But that isn’t true. If you filed a chapter 13 bankruptcy, a traditional lender will make you wait three years while keeping good credit before lending to you. But there are plenty of no-traditional lenders out there. These lenders are able and willing to work around this three-year requirement by charging you different fees and limiting the amount of credit you can take out. If you filed for bankruptcy, the best way to lower your interest rates and increase your equity is by attempting to better your credit score and by making your payments on time.