The Rules for Home Equity and Debt Consolidation

A mounting pile of credit card statements. Making just the minimum monthly payments. A credit score that drops a few points each month. If this sounds like your financial situation, take advantage of the equity in your home. Low current mortgage rates might just help you out of your dilemma.

Home equity is perhaps the most valuable financial tool that you have to relieve some of the stress of credit card debt. If used properly, you can leverage the equity in your home to consolidate your bills into one low monthly payment. And depending upon where you live, current mortgage rates will make the deal even sweeter. Here are some things you should keep in mind if you're considering consolidating your debt using home equity.

Home Equity Guidelines

• Staying Power. You should only exercise the power of home equity if you plan on staying in your home for several years to come. If you consolidate and then try to sell too quickly, you'll have to repay the portion of your equity that you utilized. This is how many homeowners become "flipped," where the value of the loan exceeds the value of the home.

• Find the Best Rates. Current mortgage rates should factor heavily in your decision to consolidate. When you refinance, the rates in your area will determine the amount you must repay. Striking while the iron is hot is the key to getting that low monthly payment that most lenders advertise.

• Choose the Right Mortgage Product. There are several options for refinancing. Fixed versus adjustable rate mortgages vary greatly in their effect on your financial future. Selecting an adjustable rate mortgage might cost less in the beginning; but if the rates change, you could see your payments rise considerably.

• Taking Cash Out. According to Fannie Mae, most lenders will require you to have at least 5% equity accumulated in your home before they allow you to take cash out of the transaction. This is a critical factor to consider, as consolidating may force you to take on more debt as opposed to relieving it.

By Kelly Richardson

Risks of Home Equity Loans

A home equity loan can be a hero if you're short of cash. It can also seduce you into thinking that you have financial freedom that you don't. Lulled by low payments and quick cash, many home equity loan users find themselves confronted by such troubles as balloon payments, penalties, and sky-high rates.

Four home equity loan traps

1. Not paying it back on time: If you get into trouble by borrowing from a friend or family member, you risk losing a valuable relationship. If you borrow from a bank or credit card company, you might damage your credit rating or need to declare bankruptcy. If you default on your home equity loan, you may lose your home.

2. Prepayment penalties spoil the party: Home equity loans often offer low closing costs and cheap initial interest rates. But if your loan includes prepayment penalties, you might be punished for paying off your debts in a quick and responsible fashion. For instance, if you decide to pay off your loan before the introductory interest rate adjusts higher, your lender might impose a hefty fee.

3. Living it up in the present, forgetting to plan for the future: Some say that the "present" is a "gift" to be unwrapped in every moment of your life. And there's plenty of wisdom in that sentiment. But it's important to remember that if you ever find yourself in a hole, you must stop digging. With some lines of credit, for instance, the borrower is able to defer payment of principal. But eventually, you have to pay the piper. If you borrow money from your own line of credit just to pay the interest you owe on it, you could wind up with a balloon payment the size of your house within a few years. And with no money to pay it off, your lender may take that house.

4. Lenders who are too easy can make your life too hard: If your lender encourages you to borrow 120 percent more than the value of your home, you might think that you just hit the jackpot. But before you sign on the dotted line, think this through carefully. It's often dangerous to borrow more than you can reasonably afford to repay. If you borrow more than your house is worth in order to pay off those nagging credit card bills, it won't make your problems go away, and may even make them worse.

By MortgageLoan.com

Home Improvement Time - HELOC or Home Equity Loan?

A home equity line of credit-or HELOC-works like a credit card. Moreover, you can access it by using a card, a check, or some other means, depending upon the lending institution's policy. A HELOC is simple to establish and doesn't require the kinds of closing costs that accompany a first mortgage. The lender, in principle, promises to lend you a certain amount of money, and the loan begins the moment you draw any of the available funds. You can use the money as you please, and the interest rate is adjustable. A good choice for a home improvement project, the HELOC is particularly attractive when interest rates are low or in decline.

Rising rates and HELOCs

These days, following a long period of extremely low interest rates, the Federal Reserve is gradually hiking rates. What's more, all indications are that this policy of escalating costs for capital will continue for the foreseeable future. In an environment of higher interest, it often makes more sense to borrow money with a home equity loan, or second mortgage, instead of a HELOC. The benefits are numerous: many of the costs and interest payments are tax deductible; you can pay back the loan over a long period of time; and best of all, the interest rates are fixed, not adjustable.

The attractive home equity loan

With low rates still available (but probably not for long), people embarking on home improvement projects may find the home equity loan to be the most attractive option on the market. Whether you're considering a landscaping makeover, a new roof, or just a few fresh coats of paint, the best tool in your financial toolbox this summer may be the home equity loan.

Home improvement projects improve the quality of your life while you live in your home. At the same time, they are a sound investment for the future, because they add to the market value and equity of your property.

If you've been waiting to improve your home, this long, hot summer may be just the time to make the improvements that will make the long, cold winter more bearable and, potentially, more profitable.

By MortgageLoan.com

Is the 125 Percent Home Equity Loan Right for You?

In an age when athletes give 110 percent, it's not surprising that banks are giving 125 percent. But there are few loans as notorious as the 125 percent home equity loan. And for good reason. Borrowers who have been sucked into the loan's clutches find themselves with much more than quick cash. They're also stuck with an extremely high interest rate and a home that, if sold, could leave them deeper in debt.

So how did such a scary little critter creep onto our financial landscape? To answer that question, you need to understand the 125 percent home equity loan.

Crash course in loan-to-value ratio (LTV)

A lender calculates LTV by dividing a loan amount by the property's appraised value. For example, if you have an $80,000 mortgage, and your home is worth $100,000, your LTV is 80 percent. Generally, loans with high LTVs will command higher interest rates. A lender has to consider how much it would cost to recoup its money if it were forced to foreclose on a house. The lower LTV ensures that a lender can get some equity out of the deal; there's no such guarantee, however, with a higher LTV loan.

With a 125 percent home equity loan, the lender actually lends you more than your home is worth. Because the LTV is sky-high, the loan comes with exorbitant interest rates (13-18 percent and higher) and booming monthly payments. Also, as you cross over the 100 percent LTV threshold, the government no longer allows you to write off the interest payments on your taxes.

Perhaps the biggest reason to avoid the 125 percent home equity loan is that you may be unable to sell your house if you want to move. Remember, you've borrowed more than your home is actually worth. If you want to move into a bigger, or even comparable, house, you'll need to pay off that extra debt you've incurred from the larger loan.

When the 125 percent home equity loan is right

When does this type of loan make sense? It may be an option if you're in dire financial straits as the result of an unforeseen medical emergency or some other severe setback, and the alternative would be to lose your house. A word of caution, however-if you do decide to take the loan, make sure you have a rigorous, disciplined payback plan. If you don't, you could easily fall victim to the downside that comes standard with every 125 percent home equity loan.

By MortgageLoan.com

Bad Credit Home Equity Line Of Credit

Bad credit can increase the difficulty that a homeowner encounters when seeking a home equity line of credit. Bad credit can be the reason for a poor credit score.

What is a credit score?

The credit score varies between the values of 300 and 850. The credit score is the creation of the Fair Isaac Corporation. Lenders who arrange for a home equity line of credit use the credit score in order to set the interest rate that will be charged the homeowner.

Homeowners with a low credit score will need to pay higher interest payments. A score above 700 is assurance of good interest rates. The credit score also serves as an indicator of whether or not a lender should accept a homeowner�s application for credit. Decisions on credit limits for the homeowner are likewise based on the homeowner�s credit score.

The credit score is a function of the homeowner�s past line of credit. In the U.S., three different agencies keep a record of each consumer�s line of credit. Those agencies are Experian, TransUnion and Equifax. If a homeowner with a low credit score wants to raise that score, then the homeowner must contact each of those three agencies.

The effort to overcome a record of bad credit and to raise a credit score requires the contesting of false claims that money is owed. If the homeowner can prove that the claim for money is spurious then the homeowner has an opportunity to raise his credit score. This action should be taken if the homeowner who plans to seek a home equity line of credit has a score less than 640. Such a score would be a sign of bad credit.

The contesting of a credit score is not like a shot in the dark. A survey of credit reports in the U.S. showed that 80% of such reports contained mistakes. Thus, a homeowner could have good reason to question the credit score that is being used to determine the interest rate on a home equity line of credit.

The credit score for a couple, a pair that are joint homeowners, is based on three credit scores from the person with the most sizable income. This is the score that the homeowner needs to make correct. Such correction may require a written statement to each of the above-mentioned agencies. Those agencies will then contact the homeowner and indicate if more information is necessary. If the homeowner is lucky, then the credit score will be increased and the interest rate for the desired home equity line of credit will be lowered.

Once the homeowner has a good credit score then he will want to avoid slipping back into that region of bad credit. This means that the homeowners must avoid the sort of spending that carries them to the borders of their credit limits.

by Jonny Goldmann

Bad Credit Refinance Loans - Finding a Good Lender

Finding a good lender to help you with refinancing your home loan can be tricky if you have bad credit. There are plenty of predatory lenders out there who would like to take advantage of you with excessively high interest rates and fees. The key to finding a good lender is to know what are reasonable terms and to compare lending companies.

Look At Your Credit Record

Credit records are not perfect accounts. Before you apply to refinance your loan, you should check to see that all your information is correct. If you believe there is a false record, resolve it with the credit reporting company.

You also want to know what your credit score is. The lower the score the higher rate you will have to pay, but at least you will have an idea of what to expect from a lender. Paying three to five additional points is common for people with bad credit history.

Compare Lenders

Lenders offer different rates for the same type of loan, so shop around. The easiest way to compare quotes is to use an online website. By entering your information online, companies compete for your loan, offering you better rates. The internet also allows you to compare mortgage lenders outside your local area, possibly finding a better deal.

Once you receive offers, compare the rates and fees. Often the fees are where lenders make their money. Adding up the interest and fees, and comparing that figure will give you the true cost of the loan.

Look For A Good Deal

Mortgage lenders increase their profits by pushing loans with high interest rates and points. Some lenders will push these types of loans even if they aren�t best for you, so beware of fast-talking dealers. Be sure to read the terms and look for hidden fees before you sign the paperwork.

Online mortgage companies eliminate some of this risk by requiring mortgage lenders to state their terms online. Online quotes are also more competitive since lenders know you are probably shopping around to refinance your loan. Once you have an offer, print out the terms for your records.

by Carrie Reeder

Consolidate Your Debt with Home Equity Loan Refinancing

Let's say you've owned your home for 10 years. The amount of your mortgage now is $230,000, but your home was just appraised to be worth $500,000. The equity you have in your home is the difference between the value of your home and the balance on your mortgage - in this case $270,000.

What is Home Equity Loan Refinancing?

In the example above, you can turn much of that money into cash through home equity loan refinancing. As a result, you get a "second mortgage" to be paid back with your initial mortgage.

Use Your Cash for Debt Consolidation

Admit it. You use your credit card for impulse purchases all the time. You bought an iPod Nano, a new leather jacket, and new rims for your car - all of which was financed by credit cards. While there's nothing wrong with using credit, you may not be able to pay it off all at once. Plus, your interest rates are likely to be very high--sometimes above 25%.

The good news is that you can use your home equity loan refinancing for debt consolidation. You can take the cash you just got from the equity in your home and pay down your high interest credit card debt--either through a debt consolidation company or on your own.

The overall idea of debt consolidation is to take multiple payments and make only one, at a lower interest rate--while paying off principle and not just interest. With money from a home equity loan, you can do just that, significantly saving on interest payments in the long run.

By JJ Singh