Home equity loans are a type of loan that places a second lien on a property. Thus, these are commonly referred to as second mortgages. There are certain benefits and disadvantages to these loans. For example, it is easier to qualify for a home equity loan with bad credit, and the money can be used for expenses such as home improvement or debt consolidation. Some home buyers use a home equity loan to avoid private mortgage insurance or jumbo loans. The negative aspect is that a second mortgage uses your home as collateral. Non-payment on the loan may possibly initiate a foreclosure.
Here is some advice for people looking for a home equity loan.
1. Avoid Negative Amortization on the First Mortgage
To qualify for the first mortgage, a borrower with bad credit may have chosen a loan program that resulted in negative amortization. On these loans, the monthly interest payment is less than the interest due, and the mortgage balance rises over time.
When a borrower wants to keep their payments low in the beginning, a lender may recommend a negative amortization adjustable rate mortgage. Before a home equity loan is approved, the mortgage lender closely assesses the first mortgage. Many lenders instinctively reject a home equity loan if the first mortgage is a negative amortization.
2. Don't Count on Home Appreciation
Several home equity loans allow homeowners to borrow more than their home's equity. This is dangerous because borrowers place all their confidence in the likelihood of fast home appreciation. Regrettably, home market values can shift unpredictably, wherein some properties may experience a slight decrease in value. As a result, borrowers may owe more than their home's worth, and they are obligated to stay in the home. Selling a property under these circumstances means the homeowner will encounter a considerable loss, and end up owing the mortgage lender a ton of money.
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