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The Various Financing Options Of A Home Equity

Mar 12, 2008
If you are a homeowner who has some equity in your home and you are in a situation where you need to borrow some money, then a home equity line of credit can be a great option. Equity loans can be used for just about any type of purchase that you deem necessary, from home improvements to vacations. Once the equity credit line has been established, it is up to the homeowner how the money will be used.

In many instances, people who have run into financial problems and have ended up with a damaged credit report because of bad credit loans or bad credit mortgage problems, turn to equity loans when other sources of credit may not be available. Once people have nasty dings and negative marks on their credit report, it is much more difficult to get a refinance loan for any reason.

If they are able to get a borrowing, then they usually end up paying such high interest loan rates that they cannot afford the payments. Even if they can afford the payments, taking out a high interest loan is just not a good financial move.

In situations such as this, homeowners who have some growth in their property will be able to leverage that asset by borrowing money against the equity. Depending on the structure of the loan arrangement, this is considered a home equity loan or an equity line, as the credit is "secured" against the home.

Since the borrowing is secured, the credit status of the borrower is not as important. That is not to say that people with horrible credit can waltz into a bank and get an equity loan without any problem. Even though the loan is secured, the lender will want to know that the borrower has the ability to repay.

Of course, people with excellent credit are also able to utilize their home's growth with lines of credit as well. But, in most instances people who have a high credit rating do not have any difficulty obtaining financing of any kind, such as mortgage refinancing, at very competitive interest rates.

Still, because equity loans are secured against your home, just like a mortgage or automobile loan, the interest rates are lower than any kind of unsecured borrowing that people with good credit are able to get. With any other type of financing, the better the credit score, the lower the interest rates on the loan will be.

Another advantage to homeowners, whether their credit is perfect or bruised, is that the interest that is paid on equity loans can be tax deductible. This aspect alone often motivates people to borrow against the growth in their home rather than using any other type of financing. They can enjoy a double benefit of a lower interest rate and a possible tax deduction if they use the long form to file their taxes.

There is a note of warning that people should also be aware of regarding the use of home equity for bad credit loans. Even though these loans open the door for people to borrow money at lower interest rates, it also creates the potential for them to lose their home if they are unable to stay current with their payments. Because of this, these loans should be used only after careful consideration and evaluation of your ability to repay.
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