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Even with poor credit, your options for getting a home equity loan are numerous. Home equity loans are different from other types of personal loans. For starters, these loans are secured. Lenders prefer this factor because it’s easy for them to recoup their money if the loan defaults.

Understanding Home Equity Loan Options

When applying for a loan using your home’s equity as collateral, there are several options. Homeowners with poor credit may take advantage of a home equity line of credit. Similar to credit card cash advances, homeowners are approved for a line of credit up to a dollar amount not to exceed their home’s equity. Homeowners are free to withdraw funds as needed. The money can be used to payoff debts, repair an automobile, or make home improvements.

On the other hand, a home equity loan is disbursed as a lump sum of cash. Similarly, the funds may be used for large expenses or major home repairs. Both home equity options must be repaid. Home equity loans have fixed terms, whereas home equity lines of credit are available for a specific length of time.

Pros and Cons of Home Equity Loan Options

A home equity loan and line of credit are beneficial because they provide extra cash when you need it. Furthermore, if you have bad credit, maintaining regular payments will boost your credit score. If the funds are used to consolidate debt, homeowners can get on the road toward becoming debt free and boosting their credit score. In fact, many people obtain a home equity loan as a means of improving their credit rating.

The pitfall most common of home equity loans is the inability to repay the money. Sadly, some people cannot handle credit or money responsibly. Thus, once debts are consolidated or paid off, some people accumulate additional debts. The smart maneuver would be to close paid accounts, which would alleviate the temptation to use a credit card.

After incurring additional debts, some people are powerless to continue regular payments. If you acquire a home equity loan, there are multiple liens against your house. Consequently, either lender may foreclose. By defaulting on either loan, you risk losing your home.

Current Mortgage Lender vs. Sub Prime Lenders

When choosing a mortgage lender, do not rely on your current lender to offer the best rates. Getting a quote from your lender is ideal; however, you should also request quotes from new lenders. Banks or credit unions will not offer the lowest rates to persons with poor credit. Nevertheless, you can attain comparable loan rates by using a lender that specializes in bad credit loans. Sub prime lenders have convenient online applications and instant approvals. If using a mortgage broker, you will receive several sub prime loan offers within seconds.

View our recommended Bad Credit Home Equity Loan lenders.

Getting a home equity line of credit is a great way to get access to the equity in your home. In fact, it may be the best way to use that equity – unless you know you have need of all of the money that is available. Here are some of the advantages that you can have with a home equity line of credit mortgage.

First Advantage – Get The Money As You Need It

With any other kind of loan, you will get a lump sum. Your interest rates and payments are set. There are no options. With a HELOC, however, you are given a line of credit and a credit card or checking account that gives you access to the funds. You do not have to use all of it, if you don’t want to. This is especially good if you know that you need some money, but really are not sure just how much.

This kind of flexibility is great, because you are given a draw period in which you can get more money when you need it. This draw period can be up to 11 years. The truth is, who knows what kind of funds you may need in the next 11 years, or so? This gives you access to sufficient money as you need it and for projects – as they come up.

Second Advantage – Pay Interest Only On Money Used

A home equity line of credit only charges you interest on the money that is drawn out of the account. You are not being charged for money that is sitting idle – as it might with other types of loans. With those loans, you are paying interest on the full amount – whether you are using the money or not.

Third Advantage – Lower Interest Rate

The interest on a home equity loan is usually lower than other types of second mortgages. Usually it is just about two percent above the prime rate.

Fourth Advantage – Possibly No Closing Costs

Most HELOC’s have no closing costs! This certainly makes it the loan of choice, and it can save you a lot of money by not having these charges added to the loan. Some lenders will charge you closing costs, so this should be a good incentive to find one that does not. It will result in considerable savings at closing time.

Fifth Advantage – Tax Deductible

The interest that you are charged each year in a HELOC is tax deductible. Ultimately, this brings the actual interest rate down lower and means an even greater savings.

Some lenders may even use a home equity line of credit on top of an 80% first mortgage in order to eliminate the Private Mortgage Insurance. The way it is done is to get the first mortgage, pay your downpayment, and then get the HELOC for the balance. Make sure you also have enough for the closing costs at settlement, too.

A home equity line of credit can come with a number of other fees and charges. Some will charge a monthly fee or an annual one (or both), and others may charge you if you let the money sit too long without using it. These charges can be avoided if you shop around for the best deal. A HELOC is an adjustable rate loan with few caps (if any) in place. Some of these will come with guarantees of convertibility to a fixed rate loan if the interest rates get too high. Also, be sure to look for any penalties that you may incur if you pay the loan off early.

Joe Kenny writes for Rebuild.org, offering home equity loans, or apply for home refinance with some great interest rates.
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