The economic reality of today dictates that alternative sources of funding need to be found. Falling incomes and the threat of unemployment means that ensuring those vital monthly loan repayments are made can be very difficult. A home equity loan, however, is an excellent solution to the problem.
For homeowners, the opportunity is there to turn the value of the equity on their house into hard cash, thus providing the funds to alleviate pressure elsewhere. What is more, these loans are considered low interest second mortgages, as the interest charged is less than on other loan options.
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But, as is the case with all forms of financing, home equity loans for people with bad credit have conditions and aspects that need to be carefully considered before applying for one.
Why Use Equity?
Equity is basically the value that a property has after the cost of a mortgage is taken into account. For example, if a home was purchased with a $200,000 mortgage 10 years ago, the repayments to date may mean $75,000 has been cleared from the mortgage principal. That share of the property value reverts to equity owned by the homeowner, so a home equity loan worth $75,000 is available.
Equity is also increased as the market value of the property increases. For example, a property worth $200,000 a decade ago may now be worth $250,000. Coupled with the repaid mortgage, that increases the available equity to $125,000. Continued market growth is good, which is why many lenders offer low interest second mortgages using equity as collateral.
However, there are risks involved, not least the fact that should repayments be missed, the home is at risk. Therefore, the math around home equity loans, for people with bad credit especially, needs to be correct.
The Low Interest Option
There are other ways to secure funding when bad credit ratings are a problem. But home equity loan has its advantages, not least the fact that interest rates associated with them are lower. This is down to the value of the security itself, with property always a sought-after type of collateral.
Low interest rates can be charged because, from the point of view of the lender, the risks involved are minimal. With the risk decreased, lenders are happy to offer these low interest second mortgages on the back of the equity involved.
There are other ways to lower the rate of interest charged on home equity loans for people with bad credit. The most obvious is getting a cosigner to guarantee the repayments. There are conditions associated with this move too, like the cosigner having an excellent credit history and a large enough income.
Secrets to Success
It is tempting to apply for a maximum home equity loan available, but this often results in more problems than it is worth. As already mentioned, equity is increased in two ways, but while repayments ensure a steady increase in that value is made, the marketplace provides no such guarantee.
Should the value of property plummet, then the equity can decrease sharply and sometimes into minus figures, or negative equity. Because the security for your low interest second mortgage is tied to the value of the equity, this can cause considerable consternation amongst lenders. And should there be any further financial problems, then no equity remains with which to secure vital further funds.
Remember, when it comes to home equity loans for people with bad credit, there is a need to provide lenders with that extra bit of confidence. By not seeking to turn all of the available equity to cash, and leaving a buffer, it shows the applicant is being practical.
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