If you have a bad credit score but have an existing mortgage with a good amount of equity, you can use it to apply for a home equity loan.
A home equity loan can be used as a ‘second mortgage’ that allows you to borrow money from the existing equity you have built on your property.
For example, if the value of your current property is $200,000, and the remaining balance to be paid is $115,000, this means that you have $85,000 already built up in equity (that you have already paid off). You can potentially get a loan for that full amount or a portion of it.
But not only that, whenever your property’s value appreciates, your equity increases as well.
Advantages Of Home Equity Loans
Here are the advantages of securing a loan from your home’s existing equity:
- Easier and faster approval. If you have a poor credit score, it is easier to get approved for a home equity loan than a usual mortgage. This is because your property essentially serves as a collateral or guarantee for the loan (also known as a “secured” type of loan).
- Tax Benefits. In many countries, tax benefits can be enjoyed by people who get a home equity loan if the funds will be used for rebuilding, repairing or improving the existing property.
- Lower Interest Rates Than Personal Loans. Compared to unsecured forms of debt such as personal loans or credit card debt, home equity loans tend to have lower interest rates. The loan duration can also be stretched out to longer periods, giving you more flexibility with your money and lower monthly amortizations.
Disadvantages Of Home Equity Loans
Of course, you also need to be aware of the disadvantages if you choose to get a home equity loans:
- Appraisal and Closing costs. The process for getting a home equity loan is similar to getting a regular mortgage. You need to settle taxes and fees that you would normally not pay if you apply for a personal loan.
- Foreclosure Risks. Because your house has been used as a collateral, failure to pay your monthly amortizations can lead to foreclosure. If you can no longer afford the house, you also need to pay the home equity loan in full before you can sell the property.
Who Should Avail of Home Equity Loans?
People who own a property that’s built a reasonable amount of equity over the years, are good candidates for home equity loans.
If you are going through a temporary period of poor credit, or if you’re rebuilding your financial standing, home equity loans can be a good option for you since these do not require stellar credit history.
What To Consider For Taking This Kind Of Loan
Make sure you have a solid reason for getting a home equity loan. Remember, you are risking your property in this loan and you could lose your home if the loan is unpaid.
This is why you have to use the funds wisely on purposes that will even further build your financial standing.
For example, you can use a home equity loan for home improvement. Not only will it give you juicy tax breaks, improving your home (adding a bathroom, or turning it into two bedrooms), can increase the value of your property further.
You may also use your home equity loan to consolidate existing debt, which can help improve your credit score.