Home Equity

Home Equity Loans: Debt Consolidation Solutions for People with Bad Credit

If you are a person with poor credit you still have options when it comes to securing an equity loan. There are low interest rate loans available, for the option of refinancing, taking out an equity line or second mortgage and rebuilding your credit. Even though credit scores below 630 are more of a risk to banks, many lenders offer different programs such as 2/28 variables, 3/27 variables, and if you need a really low payment plan the two-step hybrid loan, an interest only program, or option arm. Standard variable rate programs are often fixed for 2 or 3 years out of a 30-year period. These payments are often less than a standard 30-year fixed rate. However, after the fixed rate is over, the interest rate is set to the Bank of England's base rate, which is the standard interest rate. A mortgage lender's variable interest rate is generally set 1 or 2% above the base rate. Therefore, if the base rate is 5% and you're paying 2% above it, you'll be paying 7% interest.

Interest only plans ask you to pay only the interest due to keep your monthly payments lower. They put you behind in paying down your principal but are great for those people who aren't as concerned in paying off their principal as people looking to save or invest their money. Option arms give you the opportunity to pay what's know as a "minimum payment", which is the lowest option to maximize your cash flow. With this type of loan you also have the option of other types of payments. Each month you can choose a minimum payment starting as low as 1%, an interest only payment, a 15- year payment or a 30-year payment. If you choose the 1% option this could have a differed interest effect adding unpaid interest to the balance of your loan.

Hybrid loans are another option. They work in a two-step fashion where the loan initially behaves like a fixed mortgage for a term of 2, 3, 5 or seven years, then converts to an adjustable-rate mortgage for the remainder. This type of loan is designed to lock the loan rate lower than a typical 30-year fixed mortgage but after that initial period rates could raise yearly. Even though these loans might end up costing borrowers more in the long run, the savings during the fixed term are significant and often are used by people willing to refinance or sell their home before the adjustable period kicks in. Conditions for hybrid loan are important, therefore when shopping for a two-step hybrid, look for low margins and caps. The margin cost plus the 1-year Treasury index or Fannie Mae Libor index is used to set the rates for the adjustable period. A low margin will allow the rate to rise only so much over the index. A cap placed by the lender will protect you against fast rising interest rates. Therefore for the lowest rate, research different programs to find one that will give you the lowest margin and cap available.

If credit card bills are becoming harder and harder to pay off, you might consider consolidating your high-interest loans and using the equity that you have in your home to refinance. It is often much easier and far less expensive to consolidate your debts into a single loan than to continue paying high-interest rates on multiple and various accounts. When you consolidate, your monthly payments will often be less because they are secured by your home and are usually at lower rates than most credit cards.

Borrowing against the equity in your home to take out a credit line has also become a popular way to go. Some equity lines may provide you with large amounts of cash at relatively low interest rates and may even provide you with tax advantages. If you take out any loan remember to make your required monthly payments on time because otherwise you put your home at risk. If you're not looking to take out an equity line you can take out a second mortgage installment loan. Any money that the second mortgage issues is usually loaned as a lump sum and offer fixed interest rates and fixed payment plans.

Your credit score is made up of various factors in your credit file. Credit bureaus look at the extensiveness of your credit history, the number of open accounts, and types of accounts. The higher your credit score the less risk you are to banks and the lower the interest rates you are offered. Bad credit often leaves you with sub-prime credit cards that have high setup fees, high monthly fees, large cash deposits and lower credit lines. The easiest way to raise your credit score is to remove negative items from your credit reports and pay down high balances on any credit accounts.

Another-way to improve your credit scoring is to offer a larger down payment when purchasing a home, which in turn lowers your borrowed amount. Another thing that can be done is to lower your debt-to-income ratio. This is achieved by paying down debt before applying for a mortgage. Paying bills late, having collections, tax liens, or judgments on accounts, or declaring bankruptcy all negatively affects your credit. Always try to keep a strong credit history and your account balances low.

Dana has written many mortgage refinance articles over the years. You can read more mortgage related loan articles at Bad Credit Mortgage Refinance and learn more about refinancing second mortgages even if you have less than perfect credit.

To get more free second mortgage & refinance tips, please visit Bad Credit Home Equity Loans.

More Resources at http://www.ftc.gov/bcp/conline/pubs/homes/homequt.htm

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