Debt consolidation loans are used to avoid bankruptcy, refinance revolving credit cards, pay off adjustable rate interest, lock into a fixed-rate home equity loan to refinance lines of credit, increase cash flow and for getting a loan that shortens terms for paying off debt. "According to mortgage broker, Todd Bradfield, consolidating credit card debt into a second mortgage can have the most significant impact on increasing your credit score." Follow these home equity tips when shopping for your 2nd mortgage loan:
1. Understand the loan types. There are two types of home equity loans (second mortgages). Home equity installment loans (HEILs) are typically fixed-rate loans involving a lump sum loan on which you make installment payments over a specified period of time. Home equity lines of credit (HELOCs) are variable interest rate loans that work more like credit cards where you borrow against a preset credit limit.
2. Get the best loan for your needs. Home equity installment loans are best when you know exactly how much you need (e.g. bill consolidation). HELOCs are better for shorter-term borrowing or for emergencies.
3. Beware of sales pitches. Get everything in writing including the “Good Faith Estimate, Federal Truth in Lending” and all other loan disclosures.
4. Plan your budget ahead of time. Come up with a realistic long-term budget for the monthly payments.
5. Compare the interest rates. The rate you're offered depends heavily on your credit score: If you have an excellent score of 760 or above, you should be able to win a home-equity line of credit for half a point below the prime rate, said Chris Larsen, CEO of E-Loan. A good score of 700 to 759 should win you a rate equal to the prime rate. People with mediocre to poor credit will generally pay 1 to 5 points over prime, or more. But, lenders will compete for your business, so you may be able to get a lower rate by shopping around.
6. Compare loan fees. You may or may not have to pay a broker fee, an application fee or appraisal fee, but you probably will have to pay recording fees and, for a HELOC, an annual fee. Compare fees among lenders and try to pay as little as you can.
7. Know the tax rules. Tax deductibility is limited to interest on loan amounts of $100,000 or less. Interest paid on amounts over $100,000 can't be deducted.
8. Keep 20% equity headroom. If your combined mortgage and home-equity borrowing exceeds that amount, you'll pay higher interest rates.
9. Know what you are risking. Second mortgages are secured loans. The Federal Trade Commission warns, "Remember that these loans require you to put up your home as collateral. If you can’t make the payments--or if your payments are late--you could lose your home."
10. Consider getting insurance in case you cannot meet your monthly payments. It could save you from losing your home.
Maria writes many loan periodicals and home equity articles for mortgage banks across the country. She suggests that you shop your debt consolidation loan with mortgage professionals. Get more information and free home mortgage quotes at Bad Credit Mortgage Loans. If you need more loan advice about 2nd mortgages with less than perfect credit, take a look at the prime and sub-prime www.nationwidemortgages.net/home_equity_loans.html" rel="nofollow">home equity loans. For additional options for subordinated home financing, please visit the website or ask the loan officer about their second mortgages.
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