Your home provides shelter and warmth.  Your ATM machine provides easy access to cash.  If anything should be learned from the recent housing market crisis, it’s that the two must never be confused.

Those who don’t learn from history are condemned to repeat it.  Let’s hope this maxim doesn’t apply to the housing market.

As a housing market turn-around begins to peek through the dark clouds of the real estate market, chances are good that people will once again start tapping their home equity.  Rates are extremely low, and banks are looking to lend out second mortgage products, such as the home equity line of credit (HELOC).  Home improvement specialists are also hungry for work, and offering their services at bargain basement prices.

Despite the glut of cheap home improvement projects on the market, it may be more prudent to resist temptation and work towards building up your home equity.

Home improvement can be tempting

Why do people feel the need to treat their homes like an ATM machine?  There’s a simple explanation:  Lack of financial discipline.  For many people, the American Dream is to purchase a home.  All it requires is a down payment and a home mortgage.  If you’re fortunate enough, your house will appreciate over time, and you’ll build up home equity in your property.

Traditionally, banks have provided the means for consumers to tap their home equity by offering a second mortgage in addition to a first one.  It can be in the form of a home equity loan or a HELOC.  In essence, the bank allows you to access your home equity, provided that you pay them interest to do it.

Trouble in home improvement city

The problem with tapping your home equity, even if you’re using it to improve the value of your home, is that the market could turn on you.  Your home price could plunge dramatically, as it did after the recent housing bubble burst, and you could find yourself owing more than your house is worth.  Many people fell into that trap during the recent crisis, and it’s resulted in thousands of foreclosures.

The big question:  Have people learned their lesson?  If they have, the next home purchase they make won’t involve running out for a second mortgage the day after they’ve closed on the first.  Instead, homeowners should try a more traditional method of financing their home improvements-namely, with disciplined saving.  They should choose to budget their money carefully and live within their means.  They must provide themselves with enough equity in their home so that they’re protected in the event of another housing crisis.

A home is an investment, but it doesn’t necessarily work like stocks or bonds.  You can spend stocks and bonds in their entirety with no consequence.  If you spend all your home equity, however, you’re jeopardizing your shelter.  This is a lesson that wasn’t understood by countless homeowners during the hey-day of the housing market.  Hopefully, people won’t make the same mistake twice.

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While it’s much harder to tap your home equity than it was in the past, it’s not impossible. Yes, credit is much tighter in general these days, the decline in home values in recent years means that many homeowners no longer have any home equity to draw upon and banks are concerned about possible further declines in home values.

But many homeowners still retain considerable equity in their homes, particularly those who don’t live in states like Florida, Arizona, Nevada and California, which have borne the brunt of the housing market decline. Such homeowners continue to be attractive clients for lenders. And many homeowners retain untapped credit in their HELOC, which is still available for them to draw upon.

Lower interest rates on a home equity loan

The question is, should they? They are some very attractive reasons for doing so. To begin with, a home equity loan or HELOC will very likely have a much lower interest rate than what many credit cards currently carry. In some cases, the rate on a home equity loan or HELOC may be one half or one third of the 17 percent to 24 percent currently charged on many credit cards – many of which were charging a mere 5 or 6 percent a few months ago. On a balance of $5,000, $10,000 or more, that’s a hefty savings.

As mortgage interest, interest paid on home equity loans and HELOCs is also tax-deductable, up to a point. A couple can currently deduct the interest on up to $100,000 in home equity loans, and even more if the loan is put into home improvement.

So yes, it’s possible to save a lot of money by borrowing against your home equity to pay off credit card debt. But many financial advisers say it’s still a very bad idea.

A HELOC is secured debt

For one thing, you’re trading unsecured debt for secured debt. Your credit card debt is unsecured – if you can’t pay it off, there’s nothing the lender can do to you, other than report you as a bad credit risk. However, any time of mortgage debt – including a home equity loan or a HELOC – is secured by your home.

If you can’t make those payments, the lender is entitled to take your home. And particularly in the current economic climate, that extra $10,000-$20,000 you take out to pay off other debts could be the difference between mortgage debts that are manageable and those that are not should you or your spouse become unemployed or otherwise suffer a loss of income.

Another reason financial advisors recommend against using home equity to pay off credit cards is that it encourages continued dependence on deficit spending. Too often, the reasoning goes, someone who wipes out their credit card debt finds it too easy to start running them up again – after all, there’s a zero balance and a few small charges won’t matter. Pretty soon, they’ve run their balance back up again and now must contend with the twin perils of credit card debt AND a home equity loan tacked onto their regular mortgage.

Back into the credit card debt trap

This is how many homeowners got into trouble in the current housing crisis. Some people, it seems, are addicted to debt – they can’t avoid the temptation of those seemingly insignificant purchases that quickly pile up into big balances on a credit card. For them, tapping a home equity loan doesn’t so much provide them a way to get a handle on their debt as it does wipe the slate clean so they can start all over again! Only they’re not yet done with their previous debts…

If you do take out a home equity loan to pay off your credit cards, take them out of your purse or wallet and put them away, so you’re not tempted to use them for spur-of-the-moment purchases. Many experts advise that you actually cut them up at this point, so they can’t be used, but you’ll want to retain at least one for emergency expenses, such as a major care repair or as a reserve while traveling. But most of the time, keep it put away to avoid the temptation.

Tapping a home equity loan or line of credit can offer considerable savings for homeowners burdened with credit card debt. But only if they’re disciplined enough to keep a lid on future expenditures and not fall back into the same credit trap.

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Many people might assume that the market for home equity loans of all types is effectively dead. After all, many lenders took major losses on home equity loans in the recent downturn and are wary of getting burned again. Falling property values have also wiped out much of the equity that home owners would need to secure such loans and credit is just much harder to come by these days.

But home equity loans are still being made, although at a much lower volume than in recent years. It’s true that in highly volatile real estate markets that have seen major price declines, such as California, Florida, Nevada and Arizona, it may be extremely difficult or nearly impossible to get a home equity loan until home values stabilize.

But most parts of the country saw far more modest declines in property values than those hard-hit states, and many homeowners there still retain considerable equity in their homes. Lenders are more likely to view prices in those areas as less susceptible to further significant declines, particularly now that home prices are rising again, and may be more willing to consider home equity loans there.

Lump sum in a secondary mortgage

Generally, a second mortgage refers to single loan taken out and secured by the equity you have in your home. You get all the money in one chunk and pay it off over a number of years. The interest rate is typically higher than that on the primary mortgage, because the primary mortgage gets paid off first in the event of a foreclosure – so the risk is higher for the second mortgage lender if the property declines in value. But closing costs are less than on a primary mortgage, primary because the amount borrowed is much less.

A home equity line of credit (HELOC) is somewhat similar, but with a key difference. When you set up a HELOC, the bank agrees to lend you a certain amount, but you don’t necessarily take out any money at that time. Instead, you have the ability to borrow any amount up to your credit limit as you need it, and pay it back over time. You pay certain fees to set up the HELOC, but these tend to be less than for a second mortgage.

HELOC provides flexibility

The nice thing about a HELOC is that it provides flexibility. Say, for example, that you want to borrow against your home equity for a number of home fix-up projects you plan to take on. Instead of borrowing one big lump sum all at once, the HELOC allows you to borrow smaller sums as you need them over time and pay them back – so you’re only paying interest on whatever you’ve borrowed, not the maximum you can take out.

A second mortgage, on the other hand, is nice for when you need just one lump of cash for a single purpose. For example, instead of a number of do-it-yourself projects, suppose you’re hiring a contractor for one large project, such as adding an extra room. You take out a single loan to pay the entire cost. The interest rate is typically lower than on a HELOC, and you can get a fixed rate as well, while the rate on a HELOC tends to fluctuate over time. However, you have to make sure you borrow enough up front to cover the cost of whatever you’re planning to finance – unlike a HELOC, you can’t dip back in for more cash if you run out of money.

Lenders have tightened up their lending standards over the past year, particularly for second mortgages and HELOCs. In many cases, you’re likely to find lenders won’t authorize any loans that, when combined with the balance on your primary mortgage, go beyond 70 percent of your home equity. So to qualify, you’re going to need significant equity in your home to begin with. But if you can meet that standard, it’s still possible to get a home equity loan to finance a home improvement, education costs, investments or other major expenditures you wish to pursue.

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Most people use their equity for remodeling projects or maintenance concerns, such as a needed new roof or additional rooms onto the house. Taking out a home owner loan may be a viable option if the cash is not readily on hand. Some people may find it less expensive to remodel or update their house rather than move to a new one, or they may want to stay in their current neighborhood or city. In these cases taking out home owner loans can facilitate the changes that the owner wants to make to their house without having to relocate.

Home equity loans and equity lines of credit are two popular variations of financing personal property. With both, the homeowner can tap into the equity they have built up in their house. An equity loan is a type of home owner loan that offers a fixed amount of money over a set amount of years with the interest being tax-deductible. On the other hand, a home equity line of credit pre-approves a set amount of credit, based on the amount of equity in the property. Amounts can then be drawn from the line of credit as needed. Both home owner loans can be used as the owner chooses.

Because there are so many different options for refinanced property, the borrower will need to take some time to compare what is available for each situation. These agreements will vary in the terms they offer, as well as in their interest rates. One way to find the right one for each circumstance is to submit an application with a lender online, who will in turn, make an offer for a home owner loan. While there are many lenders available on the Internet, it is much easier to submit several applications electronically than to spend excessive time on the phone.

The decision to secure a property refinance is an important one that should be wisely considered. Home owner loans will take borrowers further into debt, so weigh whether the cost will pay off in the value of the house and whether paying off that debt can be done in a timely manner. Because God’s Word says “Owe no man any thing, but to love one another,” (Romans 13:8) seek to be prudent in the debt incurred.

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Borrowers requesting a home equity loan for bad credit should be aware that the interest rates advertised by a particular lending institution such as a bank, or mortgage brokerage will not apply to them. The borrower will receive a higher interest rate, as interest rates are directly determined by credit score. It is advised that prior to application, a borrower receive a copy of their report from one or all three nationally recognized credit reporting agencies: Experian, Equfax, or TransUnion. “Be sure to know the condition of your flocks, give careful attention to your herds.” (Proverbs 27:23) Being forewarned is being fore armed.

Once the report is retrieved, the borrower should review it for inaccuracies. Inaccuracies make up a large percentage of individual low scores. Once corrections to the report have been made, lenders should be contacted for rate quotes. As long as the score doesn’t change by the time of closing, the quote will remain valid. Home equity loans for bad credit borrowers should not shop around for quotes by having each lender pull their report. The report score will decrease by one point every time a lender pulls it.

If the home equity loan for bad credit lender cannot give a lower rate unless the score improves, quick methods for raising a score are needed. The fastest and most effective way to raise a score quickly to qualify for low interest home equity loans for bad credit is to calculate the card balance to limit ratio. If this ratio is above 20%, the borrower can pay down the balances, thus raising the score up to 30 points in as little as 30 days. If the borrower doesn’t have the funds to pay down the balance, they should consider asking friends and family for assistance. This will enable the borrower to receive a low interest rate home equity loan for bad credit with which to first pay off the family member or friend, and enable the borrower to utilize their home equity loans for bad credit funds however they choose.

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While taking a home equity loan you are actually borrowing the worth of your house. If the house is completely owned by you, then the term used for home equity loan is “mortgage”, otherwise if your house is not fully paid off but has equity, it is called a “second mortgage”. From now on we will use one term for both to facilitate better understanding. We will call them Home Equity Loans.

A home equity loan is an extra loan that you take against your home in addition to your mortgage; hence this is called a second mortgage. This enables a home owner to encash equity without refinancing the first mortgage. Most people are under the impression that the only way to raise cash is by selling their homes. However reality differs and factually one can take a second mortgage to free up the first mortgage also.

Furthering this definition, suppose you sell your home, the amount of cash left in your pocket after paying off the mortgage is called Equity. This equity when taken as a loan from a lender, without actually selling your home comes to be known as home equity loan.
Many lenders or loan companies allow you to borrow bigger amounts calculated by subtracting the balances of outstanding mortgages from 125% of the market value of your home. However the actual equity is the difference between appraised worth of your home and the balances of your outstanding mortgages.

There is no bar on how you can use the home equity loan. You can use it for any purposes as it suits you. A home equity loan is usually a one-time fixed interest rate loan, which is paid out at one go.
The rates of interest or the cost of the loan will depend on options you choose viz. the term of the loan and the amount; of course another important factor has always been your credit rating. The longer the term of the loan, the more you pay out as interest, also if the amount is more, the more interest you pay.

As always with any liabilities one undertakes certain words of caution are advised. Check all your options thoroughly before making a decision. Choose the amount carefully and take only what you need and specify the term which you think would be comfortable for you to repay in. No point accumulating liabilities in exchange for spending on pleasures or acquiring unnecessary assets.
Home equity loans are easily accessible to people with poor or bad credit rating since the lender is taking a lesser risk as the loan is secured against their home.

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Advances taken out during this draw period may have small monthly payments in which only minimal amounts are paid toward the principle with the rest of the payment going to accrued interest, or interest only payments may be made. At the end of the draw period, many plans have balloon payments in which the monthly payments will drastically increase to cover the rest of the balance due or the entire balance may be due immediately. There are plans that offer repayment of the Home Equity Line of Credit loan over a fixed period of time after the draw period has ended.

Interest of Home Equity Lines of Credit is usually variable and tied to the Prime Lending Rate, the rate in which most major banks charge their largest and most credit worthy customers. These variable rates usually have a cap to limit how high of an interest rate can be charged and some have limits as to how low the interest rate can get. Variable rates are subject to quarterly adjustment though some plans offer a fixed interest rate. The interest paid on Home Equity Lines of Credit is only paid when the funds are used and is usually tax deductible.

Like Home Equity Loans, Home Equity Lines of Credit have fees that may be charged for taking out the loan. Some plans call for one-time; up front fees while others have annual fees. Plans that offer low monthly payments during the draw period may require a balloon payment at the end of the loan period requiring the entire remaining balance to be paid. Other fees can also apply such as appraisal fee, credit check fee, and closing costs. The Federal Truth in Lending Act protects the borrower by requiring the lender to inform the borrower of all costs and terms when the application is given.

California residence taking out a Home Equity Line of Credit have the option of whether or not to allow outside and affiliate companies to have access to their private financial information. Through the California Financial Information Privacy Act, the lender can only disclose financial information about California residences with other companies if it is mandatory in securing the loan. Any other use of the information is at the borrowers’ discretion.

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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.

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