If you have high credit card bills and your credit score is going down, a home equity loan is one of the best ways to improve your credit score right away. When the loan closes, the homeowners will have money to pay their bills. So, their credit rating starts to get better right away.
Dan Ambrose, a top banker, calls these the "band-aid loan," which is also called the "2/28" in the mortgage industry.
"Most short-term loans are sub-time loans, not A paper market loans, which have a fixed rate for two years and then change."
He is talking about 30 year mortgage refinancing for people who don't have the best credit. For the first two years of a home-equity loan, the interest rate stays the same. After that, the loan changes to a variable-rate loan, where the interest rate changes with the prime rate.
This is a bad thing about the "band-aid loan." Most of the time, people with low credit scores pay higher interest rates. Dan tells customers to get ready for when the loan changes. The interest rate on a home loan could be higher than it was at first, and the monthly payments could be higher as well.
Dan says that a person's credit score goes up so much that "now every bank will do business with them" if they take the money from their equity loan and pay off all of their bills.
If you think a home-equity loan could save you from your creditors, you should keep an eye on the local housing market. "I saw the writing on the wall when I looked at the market," says Dan. "The value of real estate is going down. They are starting to move much more slowly."
And there is one more thing that could be a problem for homeowners in this situation. When the value of their home goes down, they have less equity and may not have enough equity to meet their payment needs. If the equity isn't enough to pay all of your bills and your payments are higher after two years than they were before, you could end up in a worse situation.
"There are ways for people with bad credit or no equity to get ahead, like the 125 percent loan."
With a 125 percent loan, you can borrow more than your house is worth. Talk to a professional in the mortgage industry to make sure that the credit risk is worth the return. Dan says that the most important thing is to use the cash from the equity to pay off your bills before you go on your dream vacation.
