Home equity loans, as the name suggests, are a way for homeowners to borrow against the equity that they built up in their home. For a number of years following the 2008 financial crisis, lenders were reluctant to offer home equity loans because the value of so many homes had decreased. This lowered the equity that people had built, so it was difficult for many Americans to take advantage of them.
The good news is that as the housing market has stabilized, fewer people are at risk of defaulting on their mortgage, and home values are on the rise. In fact, the home equity market has improved for its third straight year, and, according to USA Today, the number of loans increased by about 20 percent in 2015. Consequently, lenders are more willing to extend home equity loans to customers who qualify.
The key word is “qualify.”Owning a home and having some equity doesn’t mean you automatically qualify for a home equity loan. Lenders want to be sure that you’ll be able to repay your loan. Your credit score and credit history are key indicators. So lenders won’t just look at the amount of equity that you have in your home, they’ll review your credit score and your payment history on other lines of credit, such as credit cards and your existing mortgage.
While a potential home equity borrower may be current on all of his loans, he may still have a credit score that is too low for him to qualify for a home equity loan. Enlisting the help of a credit repair service such as Ovation Credit Service is a great way to improve your credit score. Our services work with credit bureaus and creditors to resolve issues that may be hurting your credit score.
A key service of credit repair services is educating you about factors that are impacting your credit score and keeping it lower than it could be. Not everyone understands how things like credit utilization and the number of open lines of credit can affect credit scores. Having an expert on your side to help navigate your credit report can help improve your score and show you which behaviors are likely to have the greatest impact on your score.
Types of Home Equity Loans
There are a lot of home equity lenders. You can go to your local bank, where you already have a relationship, or shop online for the most competitive rates. There are two main types of home equity loans:
- Traditional Home Equity Loans are a lump sum amount paid to you when you’re approved. These are best for repaying credit card debt, consolidating other loans, paying for your kids’ college tuition, or splurging on a big-ticket purchase such as a car. The funds are given to you, and you make payments based on how much you borrowed.
- Home Equity Lines of Credit (HELOC) are a great way to borrow against the equity in your home and keep some funds in reserve. If you’re renovating a room in your house or want to take a nice vacation, you can tap into some of the equity available to you. You only pay back the amount of equity from the line that you used, but you have other funds available if you decide to expand the scope of your renovation project or extend your vacation.
Things to Consider
A traditional home equity loan is a great tool for borrowers who want to improve their credit score. Having some cash available to consolidate high-interest credit cards—or pay them off entirely—is a good way to manage your credit. A credit repair service can recommend which lines of credit you should pay off first to have the greatest impact on improving your credit score.