Home equity loans are based on the value of one’s house. Equity is found by dividing your mortgage balance by the price of your home. For instance, say you bought a $200,000 home. You put $40,000 down from your own pocket and covered the remaining $160,000 with a mortgage. Dividing 160,000 by 200,000 gives a loan to value ratio of 80%, leaving you with equity of 20%, or $40,000. The more you have in equity, or the longer you’ve been paying off your mortgage, the more you can borrow in a home equity loan. Simply put, a home equity loan is a second mortgage.

There are two types of home equity loans: fixed rate and a home equity line of credit, or HELOC. Fixed rate loans give you a lump-sum, one time payment that must to be paid back within the agreed term and at the agreed interest rate. Expect the interest rate on any home equity loan to be higher than the rate on your first mortgage.

A HELOC works much like a credit card. You may even receive a special card to use. You may borrow as much or as little as you need, up to the agreed upon limit. The interest you pay depends on how much you have borrowed, and so is a variable rate.

Most commonly these loans are used to consolidate credit card debt. However, if you have poor credit you may have difficulties obtaining a home equity loan. If you are denied by banks, brokerages or on-line sites, consider a debt consolidation company. These companies are in the business of working with lenders to secure low interest loans for those with less than perfect credit. You will pay a higher interest rate, but a reputable company or individual in the business should be able to help you. Most interest paid on equity loans is tax deductible, so a higher payment could be off-set with tax savings.

If you have a need for a home equity loan with poor credit and the means to make regular payments, your next step is to shop around for the best loan terms. Investigate what your local bank offers, but don’t forget about credit unions, brokerages and on-line sites. Each has different qualifications regarding credit scores you’ll need to meet, and an application form. A home equity loan can be very beneficial in these tough economic times if used wisely and properly.

As a homeowner, you have probably accrued a decent amount of equity in your home over time. Depending on how long you’ve held your mortgage for, the equity – the difference between your home’s market value versus how much your outstanding balance – might be considerable. Funnily enough, many people who have bad credit and are unable to get traditional loans are often sitting on a great deal of home equity and don’t even realize that they could receive a bad credit home equity loan. If you have bad credit and own a home, a home equity loan is an excellent option for you.

Securing Bad Credit Home Equity Loans

Like any other loan, a home equity loan is subject to interest charges. When you have a poor credit rating, you will have to pay higher interest rates than someone with good credit. However, a home equity loan can be a springboard for improving your credit rating; depending on how much you get approved for – usually up to 80% of the equity in your home – and how quickly you pay it off, your credit rating can be improved significantly as you fulfill the terms of your home equity loan.

Where To Turn

When you have exceptionally bad credit, you should turn to a nontraditional lender who specializes in people with your circumstances. There are plenty of loan companies who are willing to work with people who have bad credit. After all, a home equity loan is not an unsecured loan – it is backed up with the collateral of your home’s equity. If you fail to adhere to the terms of your loan, the lender won’t be left high and dry. Nontraditional lenders do charge higher interest rates – you’ll probably be on the high end of the 8 – 15% rate traditionally charged – but when done correctly, this should be a short-term issue.

Improving Your Credit Through Home Equity Loans With Bad Credit
As you fulfill the terms of your home equity loan, you may choose to refinance it with a lower interest rate down the line. At the same time, you might choose to use the cash received from your loan to clean up other bad debt. When all is said and done, a bad credit home equity loan can help pull you out from financial ruin and set you on the path to a good credit score.

There’s no denying the usefulness of home equity loans. They can be used for basically any purpose – the bank doesn’t really care what you are using them for. Some people simply use them to free up some extra cash and other people use them to remodel or add on to their home. Other people use loans of this type to consolidate their bad debts. These are all great ways to use a home equity loan.

If you have great credit, it’s really easy to get one of these loans. You should be able to walk into any bank and get funds without too much hassle (Ok…getting any loan is kind of a hassle). This process is a lot more difficult if you need to take out home equity loans with bad credit. Bad credit is an indicator to the bank that you aren’t as likely to make your loan payments. This means there’s some extra risk in lending to you. The bank is likely to take some precautions before providing you with a loan and there are several ways that they’re going to go about doing that.

The first thing that can allow them some nice protection is if you have more equity in your home than you need to borrow. For example, if you have $100,000 worth of equity in your home and you only need to borrow $20,000, this provides the bank with some security. If you default on your payments, there is some extra money available that the bank can use to lessen the damage. Usually what happens in this situation is that the bank will loan you money but the terms of the loan won’t be as favorable as they would be for a person that has better credit. You will probably have a higher interest rate on your loan and you’ll be charged higher fees at the time you close on the loan.

Another common method that’s used to help lower the risk for the bank is the cosigner method. This means that a person who has better credit and/or a more established track record for paying off loans provides their name to secure the loan. They take responsibility for making the payments if you default. Usually this is a parent or a close friend. This helps the bank to make the transaction a lot more secure and everyone wins. Most home equity loans for bad credit happen by using this method.