Pros and Cons: Home Equity Loan and Home Equity Line of Credit
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Pros and Cons: Home Equity Loan and Home Equity Line of Credit
Both home equity line of credit and Home Equity Loan are retrieving the value from your home and add it you your loan. However, it is a lump sum option.
Home Equity Loan and line of credit are on the type of second mortgage loan. It is drawn on your home’s value beyond or above the loan you still owe on your first mortgage. So, in this article we are going to make the pros and cons about both options. Hopefully, this article could help you to pick the most suitable for you and your financial condition.
Comparison between HELOC and Home Equity Loan
Home Equity Loan will allow you to have a fixed interest rate and a lump sum. On the other side, HELOC or home equity line of credit gives you adjustable interest rate. Besides, some lenders will allow the borrower to convert into the fixed interest rate. You can draw money as much as you need and the interest is based on the amount of money you have drawn. You can pay the interest only if you want to. In overall, HELOC gives you more options than Home Equity Loans.
Calculating the home equity
You need to find out the Home Equity Loan rates you can get by subtracting the amount of money you have borrowed from the value of your property. According to your track record, financially, the lender will let you borrow as much as 85% of the home equity. But you should remember that since you use your home for the collateral, the lender has a right to foreclose your property if you have trouble with your payment.
The amount of money you can borrow depends on your home’s value. It is considered as the loan-to-value ratio combination. If at the end your ratio is high then the lender will reconsider to lend you more money against the value of your home and vice versa.
About home equity lines of credit
The good things about this loan are:
The interest is based on the amount you have drawn, not the total amount written in your credit line;
It could offer the interest-only payment option during the period of drawing.
The not so-good things about this loan are:
The non-fixed interest rate could increase the payment you should make;
It could make you overspend. Not to mention it can tap out the equity from your home along with figure out yourself burdened with bigger principal along with the interest payment.
About Home Equity Loans
The good things about Home Equity Loans:
It offers fixed interest rate;
The monthly payment is fixed along with the period set.
The not so-good things about Home Equity Loans:
It will tap the equity from your home. One mistake can bring you to work against your right especially if the value of your property is declined by your area.
This loan is basically a good money source for big projects, especially if the expense is made for one time. But you need to prequalify for Home Loan first.
How to Get Home Equity Loan with Bad Credit
When you want to prequalify for Home Loan, you need to have good credit. But you sometimes see ads that show the opposite. Definitely, it is a problem.
For major banks, lending institutions, and credit unions, individuals with poor credit or no credit at all will make them as high-risk customers. They surely have a strict standard that regulate the credit flows. Besides, they rely so much on score of the customer’s credit before picking one of them and calculating the terms for loan. But some states will apply the payday loan which means that the borrower must repay higher amount of money later.
Warning for bad credit
It is important to understand your own credit score because it will allow you to know how much your credit could affect your loan options. Nowadays, some websites give a free service to create your credit score report. And before you get the best interest on Home Equity Loan rates, you need to figure out your credit score. Here are the warning signs if you have bad score:
You must pay higher rate of interest than the advertisement says;
You stop to try paying down your debt and are happy to make the minimum payment even on high interest of credit cards;
You have track record on late payment on monthly bills, utilities, housing, or others;
Your account is basically overdrawn regularly;
You have issue on getting lease;
No cell phone company gives you contract.
Those things will definitely affect your credit score negatively. It will be harder for you to get the loan. But there is still another option you can try, which will require more time and investigations in order to get the best one that is suitable for you.
Looking at Credit Union
Basically, credit union is similar to a bank judging from their service, but it is owned by the members and not the shareholders. Credit union is a nonprofit institution so they will pass their earning through the members with lower fees, lower borrowing cost, and also a nicer customer service. The credit union may be willing to look at your poor credit history. Mostly, the decision of giving customer a loan is according to your promise to repay, your character, and other personal points rather than your credit score.
Co-signing with someone you trust and vice versa
You may try to borrow from your family or relatives. But if it did not work then you can co-sign the loan with other person with good credit score who trusts you. If the co-signer is qualified, the lender will mostly set the term of loan according to the best credit score because later he or she will responsible for the repayment, equally.
The information of payment will be written on both signers’ reports. So, if you late to make payment or have any trouble that could damage your credit reputation, you also have damaged the co-signer’s reputation too. But if you did great then you will be easier to get home equity line for credit in the future without co-signer.