What is a Home Equity Loan?Well if you're here you probably already know. But if you don't let's spell t out. A Home Equity Loan (abreviated to HEL) is loan which borrows against the equity in your home and uses it as collateral. so it's kinda like a mortgage. A Home Equity Loan is not the same as a Home Equity Line of Credit (HELOC). A Home Equity Line of Credit is a revolving credit line typically with an adjustable interest rate whereas a Home Equity Loan is a one time lump sum, a fixed interest rate and which reduces the equity invested in your home.
And What is Home Equity?
Home Equity is simply the market value of your home less anything you owe. A very simple example: If your home is worth $100,000 and you've paid $20,000 off your mortgage then your home equity is $20,000. Now, if your home has appreciated in value by 20% then it'd be worth $120,000 -- of which you've paid $20,000. Add in the extra $20,000 from appreciation and your home equity is now $40,000. And if you refitted your kitchen, upgrading it by $10,000 and a realtor assesses this improvement to be a $20,000 appreciation, then you can add that on too. So now you have $60,000 worth of home equity and that's what you can use for collateral against your home equity loan. Simple, huh?
So is it a good idea to take out a Home Equity Loan if I have Bad credit?
Well, a Home Equity Loan creates a lien against your property and as such anyone who has a bad credit rating will likely find a home equity loan out of their reach.
And you also need to know that if you can take out a Home Equity Loan, the debt is secured against your property. This means if you default on your loan payments your lender will try to recoup the debt by selling your home!
So beware. If you're looking to pay off that credit card debt you rang up by redoing your $10,000 kitchen a home equity loan might not be the way you want to go about it. By using a home equity loan to pay off bad credit you'll be swapping an unsecured loan for a secured loan. However, your interest rates will be lower and by using your loan well you may well be able to do something about your bad credit.
So I'm out of luck if I have bad credit? So What's A Bad Credit Home Equity Loan?
No, you're not out of luck. You can get a home equity loan if you have bad credit. Just expect to jump through some hoops. A Bad Credit Home Equity Loan is a home equity loan specially made available to people with a bad credit score. The difference between Bad Credit Home Equity Loans and regular Home Equity Loans is that Bad Credit Loans have a higher rate of interest. What interest rate will you pay? Well that will depend on your credit score. But the lower your credit score, the more interest you'll pay.
However, it's always worth your while to shop around the lenders to see who'll give you the best interest rate on a Bad Credit Home Equity Loan. But remember, your loan will be secured against you home -- if you're unable to pay the loan, the lender will simply repossess your house.