When you buy a home, if nothing changes in the way you live or the neighborhood (job market included), then within a year your home usually will raise in value. The amount your house is worth currently minus the amount you’ve paid for the home is your equity. Equity can be negative or positive in value. Some people get automatic negative equity because they get a 2nd mortgage packed in with the first. This type of no equity 2nd home mortgage is commonly 125% loan. Meaning you take out a mortgage for 125 percent of the home’s value. The extra 25% is the negative equity.

When considering a second mortgage, many people aren’t aware of the risks. Home prices can rise or fall. If you take a mortgage for 125% of the home, you start with negative equity. If your home drops in value, the negative equity increases. This means if you need to sell your house for any reason, the sale of the home won’t cover the mortgage and can result in a huge payment being due at the closing of the sale. Imagine being in a situation where you must sell your home due to finances or job relocation and owing a huge $50,000 payment. Consider all the problems when taking out a mortgage in the first place and you’ll realize a 25% extra loan can add an undue burden on you.

If you’re desperate for cash, using a 0% interest credit card, or getting a really low interest loan are better ways to go. In either case they are not dependent on the equity in your home and won’t put your home at risk.

Many people choose equity loans because of their low interest rates. Because of its low interest rate, equity loans or credit lines are chosen to do home improvement, pay for college tuition and even buy a car. The low interest rates are normally universally lower on a home equity loan because the home is served as collateral. A second home mortgage is still risky; however, it’s generally less risky than other types of loans. A home is the most important part of a person’s life, so there is a lot more incentive to pay a home equity loan on time. But a home equity loan with for people with bad credit isn’t low interest and it isn’t less risky, it’s more risk. As it’s more risky the interest rates are higher and so are the fees.

Your home is your dearest property. Putting it in jeopardy with a bad credit home equity loan is a bad idea. The interest rates are incredibly high and can snowball into late payments and the eventual foreclosure of your home. While that may seem exaggerative, it’s not just a worst case scenario. Many families lose their homes through bad credit lending. Sometimes the foreclosure is because the lending practices are predatory, but sometimes it’s because the smallest miscalculation can create a problem with finances. A bad credit loan has such high interest that the monthly payments are excruciating. It becomes a struggle to keep up. There are alternatives to a bad credit loan, if one is willing and able to wait.

Repairing credit is the single biggest way to reduce the risk associated with bad credit equity loans. A simple 1% reduction in interest can save as much as $25,000 over the life of a loan. And with the credit of many people being adversely affected by the recent economic meltdown, more and more ways of repairing credit are appearing. There are credit counselors that work with your debtors to create a time line of repayment in full. They usually can reduce monthly payments to one single payment. There are government programs designed to teach people how to manage their money and repair credit. And lastly there are secured credit cards to prove to creditors you’re able to make timely payments on a revolving loan. There are a lot better options than taking out a bad credit home equity loan.

So what exactly is a reverse mortgage? It’s a loan that pays you, the borrower. The equity in your house is used to create a loan amount which is then paid to the borrower in several ways. The first way is to have a set monthly payment every month until the home is no longer lived in by the borrower. The second way is a set number of payments for a determinate amount of time, usually 5-10 years. Reverse mortgages can be taken out as a line of credit as well. This is one of the best types because it allows you to repay the loan and reuse the credit line. Some of the most common reverse mortgages are a combination of the above.
How does a reverse mortgage differ from an equity loan? They do sound alike, after all. Right? A reverse mortgage doesn’t need to be paid at all until the home isn’t the primary residence of the borrower. The interest continues to accrue however, and in the event of the sale of the house or death of the owner, that interest needs to be paid.

Reverse mortgages are great for those who are a lot older and in dire need of funds. The funds should be used for things like emergency health care. Otherwise, a reverse mortgage is not a great bargain for a borrower. And the earlier you take out a reverse mortgage, the more interest that accrues.

One reason a reverse mortgage loan is chosen over home equity is because it requires less credit qualifications. Specifically, your debt to income ratio is less important with a reverse mortgage, unlike any other revolving credit lines. The interest rate and loan amount is calculated on the length of time you’re in your home, the value of your equity (your loan minus the amount your home is worth now) and your age. The older you are, the longer you’re in your home is what determines your interest rate.

Reverse mortgages sound great, but they can be debilitating. They’re expensive and can create a situation where, if the owner needs emergency cash it’s unavailable due to be tied to this type of loan. This type of loan is also sold to consumers as a way to invest cash, but, in the long run, the loan will cost much more than most money made investing it. Your home already is an investment.

Having poor credit can make you feel embarrassed. Often borrowers are taken advantage of because of they often feel there aren’t any other choices. Many loan brokers are the only firms/people that finance any loan, including a poor credit home equity loan. They offer interest rates at the same rates as credit cards, and borrowers aren’t aware that they a) can qualify for lower interest rates than they are offered and b) can sometimes repair their credit in just a year saving them hundreds of thousands of dollars.

A typical home equity loan is anywhere from $30,000-$50,000. While the interest rate is lower than an unsecured loan, for bad credit borrowers the interest rate is still insanely high. Generally, with poor credit, a borrower can count on at least a 12% interest rate. At a ten year amortization the monthly payments would be around $450 and total nearly $22,000. Split that interest rate in half, for a good credit loan, and the payments amount to about $330 and around $10,000 in interest. In a ten year period, the borrower saves nearly $12,000, a hefty sum.

So how does anyone with poor credit get a home equity loan at low interest? The answer is to repair any bad credit history. This is easier said than done for anyone with unpaid bills. But if you’re able to pay off the bills and reduce your debt to income ratio, you can easily raise your credit score in a year or two.

The best way to start raising your credit score is to reduce your debt to income ratio. Since this is difficult for many people to do alone, visiting a credit counselor will help. A credit counselor can consolidate all your bills into one payment. They also arrange better terms of payback with your creditors.

Another way to increase your credit score, if you’re DTI isn’t a problem, is to get a secured credit card. Following the payment terms for 12 months can raise the FICO score on your credit report. A secured card is a credit card with a limit based upon a deposit made to the lender.

The bottom line is getting a home equity loan with bad credit is a terrible idea. Instead, spend a little extra time to increase your credit score and then apply for the loan as needed. Keep in mind that a home equity loan will have lower interest than a home equity line of credit, although both can be used for the same purposes.

If you are wondering who offers these type of loans, then you may want to consider the place you originally got your mortgage from. If they offer home equity loans low interest will likely be an option, since you are already paying them for the mortgage. Generally, the place where you get the loan or mortgage will be the place to get your home equity loan, because then the loans can be combined and they won’t be as worried about making money from your interest, as you are already financing your house through them.

One of the most common things to do with your home is to use your home equity loan for home improvements before the sale. A few home improvements can make a difference in how quickly you close the sale, and how much you get for you house. Money that you spend doing upgrades will benefit you when you go to sell, and this is smart use of a home equity loan. You should spend the money upgrading certain parts of your home that will benefit the house, as it is placed on the market. Make the best use of your home equity loan if you are using it for home improvements before the sale.

One of the best ways to add value to your home is to use the home equity money to improve your kitchen, specifically making better lighting and updating the appliances. Also, the flooring should be looked at and replaced as needed. Also, you could use the money to create another bedroom or bath or half bath. If nothing else, use the money to improve the trim and paint around your home. Use your home equity loan wisely and you’ll be able to improve the value of your home in order to sell it for a much higher price.