Sometimes you need to find a way to borrow money for your home, but your credit score may be less than perfect. Instead of being forced to apply for a loan with a high mortgage loan interest rate (thanks to your low credit score), there are options around this. By taking out a home equity refinance credit, or a loan, you are able to acquire a loan to relieve you from debts or remodel your home.
Home Equity Loans
A home equity loan allows a homeowner to acquire a loan by using the home as collateral. Many homeowners who have a poor credit score or need to borrow a large sum of money tend to look at the home equity loan for assistance.
Start your comparison Lenders find this loan safe, even if the borrower is a high risk due to a poor financial history, because the borrower cannot hide from the lender if payments are not made. When payments are not made, the lender can collect the home, or the collateral. This makes the borrower more apt to make the payments since the home is on the line.
Many people tend to use home equity loans for a variety of reasons. Often considered a second mortgage, a home equity loan is not the first loan used on the home. Instead, this loan is taken out after the initial loan has been acquired. A home equity loan can be used to renovate the home to increase the home’s value, be able to consolidate high-interest debts, and pay off medical bills or college tuition.
Fixed Rate Home Equity Loans
Home equity loans often have a fixed interest rate instead of a flexible interest rate. This means that instead of the interest rate fluctuating based on the market, like traditional mortgage loans, the interest rate is fixed at the start of the loan and remains the same throughout the duration of the loan.
Fixed rate home equity loans are useful since they allow the borrower an opportunity to fit the monthly payments into a budget. A fixed rate loan ensures the borrower that the monthly payment will remain the same during the entire loan. Even if the market influences most interest rates up, typically increasing monthly payments, a fixed rate home equity loan keeps the interest rate and monthly payment the same. This allows homeowners and borrowers to not fear a higher than normal monthly payment.
125% Home Equity Loans
Unlike most home equity loans, a 125% home equity loan does not require the borrower to have any home equity. This home loan allows the borrower to borrow up to 125% of the home’s value, making this loan extremely risky since the borrower is borrowing more than the home is worth.
If the borrower’s home is only worth $250,000, the 125% home equity loan permits up to $312,500 to be borrowed. Whereas most borrowers take out a home equity loan to borrow around $50,000, a 125% home equity loan—in this example—allows the borrower to borrow over six times that amount.
In order to qualify for a 125% home equity loan, the borrower needs to have an excellent credit score, with a minimum score of 650. The borrower must have a stable employment history, the current job must pay well, and the borrower must be likely to stay in that position for awhile. The borrower also must have a credit payment history where the payments are made in full and on time. The reason for all these strict requirements hinting towards a person with a strong financial record is that the 125% home equity loan can be profitable for the lender when the borrower makes the payments due to the interest rate. If the borrower fails to make the payments, then the lender loses on this type of investment.
Bad Credit Home Equity Loans
Sometimes a borrower has a poor credit score, creating difficulty in acquiring a home loan. One option for those with bad credit is to get a bad credit home equity loan. Most loans for borrowers with poor credit attach a high interest rate to the loans. Since lenders follow the mantra “the higher the score, the lower the interest; the lower the score, the higher the interest” when determining the interest rate based on the credit score, someone with a low credit score is faced with a high interest rate.
Bad credit home equity loans, however, do not force a high interest rate onto the borrower. Since these loans use the equity of the borrower’s home as collateral, the interest rate becomes based on the value of the outstanding equity, reducing the influence of the credit score.
Consolidation Home Equity Loans
One main use for a home equity loan is to consolidate debts. Consolidating debts consists of paying off all debts with one single sum. Instead of having four debts with varying interest rates and payment due dates, consolidation allows you to use a loan to pay off all debts, and then only have to keep track of paying back one loan with one interest rate and one due date.
Consolidation home equity loans allow you to take out a home equity loan, use the amount to pay off all existing debts, leaving you with only one loan to repay. The amount that you can borrow depends on the market value of your home. You can use a home equity loan calculator to calculate the market value, or the difference between the appraisal value and the remaining balance on your mortgage.
As you can see, there are many options for you to consider when looking for a home equity loan. There are home loans out there for you whether you have bad credit or are a borrower who likes to take risks. Before committing to a loan, research different lenders and find a home equity loan which has an affordable monthly payment, a term you can commit to, and an interest rate which will not break your bank.
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