Home equity loans for debt payoff

By Michele Lerner
Mortgage Credit Problems Columnist

Though thousands of U.S. homeowners owe more on their mortgage than the value of their home, there are some homeowners who still have equity in their property. In times of tightened credit standards, lenders are more willing to approve a home loan for homeowners with a low remaining balance on their existing mortgage.

Home equity loans for bad credit borrowers

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Homeowners with a low credit score may still qualify for a home equity loan or a home equity line of credit from a bad credit mortgage lender. Home loans for people with bad credit generally require borrowers to pay a higher interest rate and/or higher fees for the loan -- but when mortgage rates are low as they are today, even poor credit mortgage rates may be affordable.

Lenders typically allow homeowners to borrow a maximum of 75 or 80 percent of their home value for the combined amount of the first mortgage and home equity loan.

If you are borrowing from your home equity, should you choose a home equity loan or home equity line of credit? Consumers should consult with a lender to consider which loan option works best for their financial needs. A home equity loan allows the borrower to receive a lump sum of cash based on the available equity. The loan is then repaid in installments at a fixed interest rate. A line of credit usually has a variable interest rate and can be accessed as needed, like a credit card. The monthly payments on a line of credit can change over time as the interest rate and balance change.

Homeowners who want to use their home equity as a debt consolidation loan might want to pay off their credit card debt and to avoid the temptation of having their home equity available on an ongoing basis.

Using a home equity loan to improve your credit

Home equity loans can be used in two ways to improve your finances.

First, you can use home equity loans for debt relief, consolidating debt into one payment, usually with a lower interest rate and the possibility of a tax deduction on the interest.

Second, if your equity is not enough to repay all your debt, you can use the home equity line of credit or loan proceeds to improve your cash flow and reduce your debt faster.

Homeowners with bad credit may enter their information in an online form to find mortgage lenders -- and get started on their road to financial recovery.

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