How Can I Get a Home Equity Line of Credit With a Poor Credit Score?
A home equity line of credit gives homeowners necessary funds for major expenses.
Having a poor credit score that is below 620 can be a hindrance when you want to secure a home equity line of credit. You may be nervous about whether you will be approved for a HELOC that you can use for major purchases such as home repairs, school tuition or a new car. A poor credit score alone won't close the door to a home equity credit line, but it will often mean higher interest rates and lender fees. It is important to shop around and compare rates to get the best possible offer.
Review your credit report carefully to determine why your credit score is low. Over-limit credit cards, late payments and collections accounts are three common reasons for low credit scores. If you notice any inaccurate or outdated information, work with the credit bureaus or creditors to have the information fixed. All three credit bureaus will work on your behalf to dispute potentially inaccurate information that is lowering your score.
Take some time to pay off debt and practice good credit management if you don't need the home equity line of credit immediately. Increasing your available credit and paying bills on time each month will go a long way toward increasing your credit score and making you more appealing to lenders. It will also help you secure a lower interest rate when you do get approved for a credit line.
Establish equity in your home to make your credit application more appealing to lenders. Because you are using your home as collateral, you will be viewed as a "lower-risk" candidate if you have at least 20 percent equity in your home. In general, the more equity in your home, the less risky your loan, as perceived by lenders.
Shop around for quotes from at least three lenders so that you can compare interest rates, annual fees, closing costs and loan terms. When comparing quotes, look at the potential advantages and drawbacks of each loan, such as the type of interest rate, which may be variable or fixed; the minimum purchase amount; the annual percentage rate; and the repayment terms. Because you are putting up your home as collateral, it is extremely important that you choose a line of credit that fits your budget--now and in the future. If you choose a variable interest rate and the payments increase to a monthly amount that is beyond your means, you could lose your home.
Home Equity Loan (HEL) Vs. Home Equity Line of Credit (HELOC): which is Better?
I’m not a big fan of debt.
But there are times in your life when it makes sense to pay off (or avoid) high-interest debt with low-interest debt. For example, using a 0% APR credit card with no balance transfer fee, in order to pay off a high-interest credit card can be a wise move, if executed properly.
Another example could be using your home equity to take out a low-interest home equity loan or a home equity line of credit, in order to pay off higher interest debt.
But before you run out to your bank, you must first understand the risk involved and the differences between the two.
A home equity loan, or HEL, is a second mortgage taken on a home, using your equity in the home as collateral. It usually comes in the form of one lump-sum payment in the beginning, with a fixed interest rate.
That doesn’t mean anything unless you know what home equity is, so we should probably cover that first.
Home equity is the market value of what you actually own in your home. It is calculated by taking the total market value of the home and subtracting any outstanding loans on the property. Take, for example, a home that has a current market value of $200,000 and you have a mortgage of $125,000 remaining. You would have home equity equaling $75,000 ($200,000 – $125,000).
A home equity line of credit, commonly referred to as a “HELOC”, is also a secured second mortgage, that taps in to the equity you have in a home.
The main difference between a HELOC vs. a home equity loan is that there is no lump-sum up-front payment, and funds that are borrowed as needed using a line of revolving credit, meaning that there is no fixed re-payment schedule or amount. You borrow what you need, when you need it, up to a specified credit line. You simply pay what you can (above and beyond minimum monthly payments), and your APR is based on the balance you owe. HELOC’s are much like credit cards in this respect, and are more flexible than HEL’s.
Another way they are like credit cards is in their calculated interest rate. They, most often, use a variable interest rate, taking whatever the prime rate is, and adding a margin to that. There are some HELOC’s that allow you to lock in your rate, however (a very valuable feature in periods of low interest rates, like right now, given how the prime rate cannot go any lower than it currently is).
HELOC’s generally have a lower APR than home equity loans because of the risk of interest rates increasing.
As mentioned in the beginning of the article, HEL’s and HELOC’s give you the opportunity to leverage your home equity to take out a loan with a low interest rate. In today’s borrowing climate, these rates are often lower than credit cards, consumer loans, auto loans, and even some student loans.
Interest on both HEL’s and HELOC’s can be tax deductible.
Home equity loans and HELOC’s are both forms of secured debt against your home. The low interest rates you can get on HEL’s and HELOC’s are a result of them being secured against your home. If they are not paid off, you could be forced to foreclose on your home. As such, they should always be paid back in full.
Here’s the deal – both can be used strategically to pay off or avoid high interest debt. But they can also be grossly abused, if turned into a shopping spree or a justification to spend money on something you wouldn’t otherwise be spending it on.
Another risk with a HELOC is the potential for their interest rates to increase with adjustments to the prime rate. You could get stuck paying back your balance at high interest rates down the road, even if interest rates are low today.
Here is a breakdown of the different aspects of each.