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Bad Credit Equity Loan
By Jena Collier on January 25, 2011

flat-broke-(1).jpgBad credit equity loans, also known as a second mortgage, are at times equated with hard times and hard decisions. And while they can be useful as a last resort option for those with bad credit, it may also be a good way to secure a relatively low interest-rate loan. Below are some of the pros and cons of bad credit equity loans.

Pros of a Bad Credit Equity Loan

  • Low interest rates compared to personal loans
  • You may receive a tax-break on your interest payments
  • It is a fixed loan, meaning the interest rate won’t change like a credit card

Cons of a Bad Credit Equity Loan

  • If you default on the loan, they can take your home as collateral
  • The real estate market is volatile, and if it crashes you may end up owing more on your house than it’s worth
Taking out a bad credit equity loan is a complicated choice. Most of all make sure the loan is absolutely necessary and cannot wait until you can save up cash. Your home is nothing to take lightly, so really look at your cash flows before making this decision.

When deciding whether to give you a bad credit equity loan, a bank will look at several factors:
  1. Equity in the first mortgage: It helps if your house is worth significantly more than you owe.
  2. Debt-to-income ratio: Lenders want your income to be higher, preferably much higher, than what you owe.
  3. Credit score: A high credit score always helps.
  4. Employment history: Lenders are looking to reduce risk, so if you have a history of staying at one job for an extended amount of time, you’re more likely to get a loan.
Bad credit equity loans can be a great option for a low interest, tax-deductible loan if you are absolutely sure that you can make the payments and not default: your home depends on it.
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