For thousands of would-be homeowners, the dream of owning their own property – be it a simple apartment or a large family home – is made an impossibility due to a poor credit score. From tiny mistakes made years ago – unreturned video tapes, parking fines, or other unpaid bills – even the most responsible borrower can find trouble when searching for an affordable home mortgage.
It’s a major issue, and one that’s rarely reported on by financial experts and property gurus. While the cost of property itself is discussed on a daily basis by those in the industry, and thrown near to those planning to purchase a home, the interest rates on mortgages and the effect of a credit score on these mortgages is rarely discussed. In fact, it’s often never discussed in the media at all.
It’s this lack of attention to the financial side of buying a home – the true financial side – that’s to blame in part for the recent housing and mortgage crisis. Borrowers, all of whom knew very little about their mortgages’ effects on the economy, took to the market in droves, buying up property with the expectation that it would always succeed as an investment, and never hurt their credit.
Unfortunately, the exact opposite was true. For the hundreds of thousands of homeowners that have been forced to default on their mortgages, purchasing another property seems like an impossibility. With mounting debts working against them, or alternatively a credit score that explains every aspect of their default, many of those who dream of owning a home are unlikely to ever achieve that goal.
However, what about the many people that still have a home, yet are struggling financially? While a great deal of people were forced to default on their mortgages in the last few years, there’s certainly a large amount of homeowners who still own their homes, yet are financially unstable. For many of these homeowners, an alternative investment option is available – a bad credit home equity loan.
Bad credit home equity loans are loans that are secured against a portion of the equity in your home. A simple service that’s easy for homeowners to understand and access, they allow a homeowner the ability to release a certain portion of the equity in their home in exchange for financing. This allows a struggling homeowner to pay their bills, cover their expenses, and live a much better life.
It also allows those with poor credit, often due to the effects of the recent housing bubble, to repair it in a way that’s safe both to themselves and to the bank or financing company that they’re taking a loan from. As bad credit home equity loans are backed up by a portion of their home’s equity, they are a significantly smaller risk for the lender than an unsecured loan, increasing their availability.
As with any type of loan, there are things to look for, and things not to look for, in any bad credit home equity loan. The first distinction, and one that’s of increasing importance today, is between a fixed rate loan and an adjustable rate loan. The two loans, despite sounding somewhat similar and being marketed similarly, are very different, and as such have different consequences for borrowers.
A fixed rate home equity loan, known as an ‘equity release’ in some areas, is a loan that’s tied to a static interest rate. It will never change, never increase, never decrease, and never spiral until it is out of your control. It’s a stable investment option, and it’s been the backbone of mortgage lending for decades. It’s also considered the most financially conservative and low-risk of the two options.
The second option, an adjustable rate loan, is an interesting type of loan. These loans have interest rates that can move upwards or downwards with the economy as a whole, depending on the what the interest rate happens to be when the repayment is made. As such, they’re significantly higher risk than a standard fixed rate loan, yet more rewarding in times when interest rates are low.
Both types of bad credit home equity loan offer advantages and disadvantages, the types of which are up to you, as a homeowner, to decide on. However, given the consequences that adjustable rate loans have had in recent years – the recent housing ‘bust’ being one of them – it’s worth noting the added risk they come with. While potentially rewarding, they’re a very risky type of loan.
Finally, it’s important to compare multiple different home equity lenders, as the amount of money that’s offered in a loan, the interest rate applied to the loan, and the home equity expectation can all differ dramatically from one lender to another. Always speak with three or more lenders before you make a decision, as the ‘great deal’ one offers you can often be beaten by meeting with another.
An interesting investment option, and one that brings new cash flow and financial longevity to hundreds of thousands of homeowners with poor credit, a bad credit home equity loan is quite a smart financial decision these days. Whether for cash flow or a long-term credit rating boost, it’s one of several convenient, accessible, and fairly affordable refinancing options for homeowners.