A home equity loan, or second mortgage allows you to borrow a lump sum and secure it with the built up equity in your house. You may be able to access up to 125 percent of the market value of your home, less any outstanding mortgages; depending on your lender and where you live. Bad credit home equity loans can be used to help rebuild your credit history and create a stronger credit score. The terms most often depend on the type of mortgage negotiated.
The home equity loan has some strong advantages including, a lower interest rate and since it is a form of mortgage it is usually tax deductible. However, you are securing the loan with your house, so it has more security for the lender and is riskier for the home owner. Some restrictions apply to the tax deductions available on your home equity loan, so it is important to check with your tax professional prior to obtaining the home equity loan.
Common types of home equity loans include (HELs) or Home equity loans with
fixed terms. This works like a traditional mortgage. The lump sum is distributed
and payments are amortized over a set number of years. The interest rate is
usually stable and usually for 15 years, but is generally higher than the current
mortgage interest
rate. The Home Equity Line of Credit (HELOCs) is an agreement with the lender
to advance funds to an agreed upon limit, which are accessed only when needed.
In the home equity line of credit, the interest rate tends to be variable. Interest
is paid only when the money is withdrawn. Monthly payments are calculated as
a percentage of the total outstanding. There may be stipulations about when
you can make withdraws, initial withdrawals and monthly minimums. The home equity
credit line is usually for 10 to 20 years.
In bad credit home equity loans, the lender may freeze the credit line if they
believe you will fail to pay your loan or if the value of the house declines
dramatically. The home equity loan can be used as a second mortgage at the time
the house is purchased. Two loans instead of one can be designed to relieve
the home owner from buying mortgage insurance or PMI, if neither loan exceeds
80% of the purchase price of the home.
Since the lender is securing the loan with the house, and the lender can freeze the home equity loan; the best home equity loan is a home with positive equity and not likely to decline in value. The home equity loan home relies upon the value of the home being significantly higher than the mortgage total.
The home equity loan is a serious financial tool, and should not be entered into lightly. The home equity credit line or loan should not be used for frivolous purchases, but rather should be used for strategic financial decisions. The bank or lender is more secure in this arrangement than the home owner.
In the current housing market, the homeowner is often trying to refinance.
The second mortgage or home equity loan lender can often stand in the way of
the refinancing decision. The Government is trying to ease the terms for distressed
homeowners so that refinancing decisions can be made faster and to prevent the
second mortgage from preventing the homeowner from saving their home. Home equity
loans and second mortgages can be detrimental in attempts by the home owner
to create short sales. New regulations are aimed at making short sales and other
anti-foreclosure procedures to be simpler, more responsive and less restrictive
for the home owner.