Understanding the Difference Between Home Equity Loans and Home Equity Line of Credit

Jul 13 2020 Published by under Uncategorized

Property owners often wonder how they can use the value of their house to access low-interest financing. A loan or a home equity line of credit are two options available to you. To figure out which will better suit your needs, see some of the differences below.

Home Equity Loan (HEL)

A loan tapping into the value of your house is a good way to borrow money. This option allows you to get a fixed amount and receive it in one lump sum. The amount you receive is based on your home’s value, payment terms, verifiable income, and credit history. You can get it with a fixed rate, fixed term, and even a fixed monthly installment. In addition, interest payments are 100 percent tax deductible.

Home Equity Line of Credit (HELOC)

With a home equity line of credit, you do not get your money all at once. Instead, you open a revolving credit, which allows you to receive money as you need. Your house is used as collateral to open the credit account. Companies approve this type of account based on the appraised value of the property and subtracting the current balance of the existing mortgage. Some consider income, debt ratio, and credit history.

Unlike a HEL, on a HELOC you withdraw the funds as needed over a period of time, usually five to ten years. Plans vary and you may have special checks or a card to use in order to access your funds. Depending on your account, you may have to borrow no less than a set amount each time you access it. You may also have to maintain a minimum balance outstanding. Some plans require a specific initial withdraw as well.

After the “draw period” ends, some HELOC providers will allow you to renew the terms of the account. Not all lenders allow you to renew the plan. In addition, once the “draw period” has ended, you enter the “repayment period.” Your lender may require you to pay back the entire amount at this time. Others allow you to make installments.

How Do They Differ

While both a HEL and an HELOC allow you to tap into the value of your property to gain access to financing, there are two major differences. That is the interest rates and the repayment terms.

With a HEL, you get a fixed interest rate. This means you know what your interest rate is from month to month. This also makes your payments fixed, making it easy to budget each month.

However, a home equity line of credit usually has an adjustable rate. This means that the monthly interest payment can shift based on the index. Lenders traditionally add a margin of a few percentage points to the prime rate. You should ask the lender what index is used, what is the margin charged, how frequently does the rate adjust, and what the cap and floor on the rate is.

Since the interest is adjustable, monthly installments fluctuate. In addition, during the draw period you could be responsible for repaying the monthly interest only, not paying on the principle until after the repayment period begins.

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Home Equity Loans With Bad Debt: 6 Steps Before Getting a Loan Specialist

Jul 13 2020 Published by under Uncategorized

A bad credit score makes a huge impact on all types of loan. If you are one of those who has a bad credit but in desperate need to take out a home equity loan, know that it is possible for you to apply for a loan with bad debts. If you have started your research online, you may have already known that home loans with bad debt are possible.

Homeowners who have a great value on their homes have a better advantage and could have a greater opportunity of getting mortgage loans despite bad credit.

6 Steps to Consider Before Getting a Loan Specialist

1. Understand Home equity loans with bad debt

A home loan with bad debt may be used for making improvements or perhaps renovations on your home. This type of loan can offer interest rates which are much easier to manage compared to personal loans.

Note that loans with bad debt may impose higher interest rates as this type of loan are considered high-risk loans. Also, you need to have a good value for your home to be highly considered.

2. Find out which banks or lenders provide home equity loans with bad credit

Several banks and loan companies offer bad credit home loans. This loan type will have very specific conditions and qualifications that the borrower will have to meet. Compared to other loans with bad credit, a home loan has a higher chance of approval given that homeowners are using their home as a collateral.

You can start with your local bank and other lending companies in your area. When inquiring for a loan with bad debt, make sure that you have the latest copy of your credit report for them to check.

Important: Frequent inquiries on your credit history can further dent your credit standing so it is better to get a copy that you can readily show to banks and lenders when inquiring about mortgage loans.

3. Prepare the documents required to qualify for a home equity loan

First, get a copy of your credit file so that you can determine your credit rating. Having your own copy of your credit report will help you gauge how serious is your credit standing. There are many factors affecting a bad credit rating. At this point, you may want to decide what actions you should take to improve your rating before actually applying for a loan.

Gather all your financial documents for the lender to review. Financial documents include the following:

  • proof of income
  • your investments
  • other assets
  • current equity on your home

Consider looking at three or more lenders near you. Compare terms and interest rates to find the best offer.

4. Work on improving your credit standing

Despite the fact that some banks and financial institutions can offer an equity loan with bad debts, it is still a good idea to work on improving your bad credit. Find out if you can make use of a credit repair service. Avoid further debts as it may lower your chances of getting a loan for your needs.

Make sure that you know your credit history. Banks and lenders will ask you why you have incurred bad debts. Most bad debts are due to the declaration of bankruptcy or divorce. Considerations are high when you are doing something about paying off your bad debts.

5. Consider all your options

Credit unions. When looking for a home equity loan with bad debt, you have to look at all your alternatives. For instance, other equity loans with bad debt include credit unions or one that is connected with your company. These kinds of establishments may help with your loan needs based on your financial position.

Getting a cosigner. Get someone with good credit to cosign for the loan. This may appear like a simpler option compared to going through bad debt home equity loan companies. But this will take you some convincing that you can be trusted with the loan. Cosigners will take the same responsibility of paying off the loan in case you make a default and this scenario will damage both you and your co signer’s credit standing.

6. Get a loan specialist

A loan specialist can help you go through your options in getting a home loan despite bad debts. They can match you with home equity loan lenders who offer bad credit loans and may help you acquire a tax-deductible home equity loan at an interest rate with very few prohibitions. It’s crucial to note, however, that there are specific restrictions on claiming your loan as a tax reduction.

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