A second mortgage can provide Americans with a means of tapping into their home equity for any number of reasons. If you have a sizable amount of equity built up in your home, you may be able to use it to your advantage. But what about if you want to take out a second mortgage with bad credit?
Trying to pay off your mortgage early? Read this to learn how.
What is a Second Mortgage?
A second mortgage is a loan that allows you to borrow against the equity in your home. Your home is considered a valuable asset, an asset that can gain even more value over time. Also known as a home equity loan, second mortgages can provide homeowners with the means to use the equity in their home for other expenses or projects.
Benefits of a Second Mortgage
Perhaps an unexpected expense just popped up that needs to be dealt with, or a major home improvement is required. In cases like these, a large lump sum of money may be needed, which would normally be tough to come up with. A second mortgage can be the ideal way to obtain such large sums of cash.
Homeowners might also want to take out a second mortgage in an effort to consolidate their debt. If you have many different bills to pay every month, consolidating your debt will provide you with one bill to manage, rather than several. This can make it easier to keep tabs on your debt and prevent any missed payments. You may also want to consider consolidating your high-interest debt as you could end up saving a significant amount on interest in the long run.
Be careful! Debt consolidation might damage your credit score. Click here for more information.
Lower Interest Rate
By taking out a second mortgage, you can consolidate your debt and be left with one debt amount that comes with a much lower interest rate, which can end up saving you a great deal of money at the end of the day.
You might also want to take out a second mortgage to pay off your first mortgage. The main reason for this is so that you can take advantage of a lower interest rate with the second mortgage while paying down a much higher-interest home loan. If interest rates are much lower today than they were when you locked into your mortgage, you could potentially save tens of thousands of dollars if you take out a second mortgage at a lower rate.
You can also manage your money by creating an effective budget.
Clearly, the benefits of a second mortgage are numerous and can help you save a great deal of money. It can also help you get a better handle on your debt. But what about if you have bad credit?
How to Get a Home Equity Loan With Bad Credit
Your credit score is a critical component of your overall financial health. Good credit can afford you plenty of opportunities to obtain loans at favorable interest rates. On the other hand, a low credit score can limit your options in terms of the types of loans you can take out, as well as the types of interest rates you’d be given. For the loans that you may be approved for, you will likely be stuck with a high-interest rate that will make any loans you take out more expensive than necessary.
As such, applying for a second mortgage with bad credit could be more difficult in comparison to applying with good credit. In the eyes of lenders, you are considered to be more of a risk because of your low credit score. The worse your credit is, the higher the interest rate and the more stringent the borrowing terms will be.
That said, it is still possible to refinance your house if you have bad credit. Here are a few steps you can take to make that happen.
Dispute Errors on Your Credit Report
Before you accept your credit score as is, make sure it’s accurate. It is possible for there to be mistakes on your credit report that can bring down your score unfairly. You will only know if there are errors on your credit report if you pull it. Should you find any, make sure to report them to the U.S. credit bureaus (Equifax, TransUnion, Experian) and have them investigated. You can improve your credit score just by having these mistakes on your report rectified.
To learn more about what credit reporting agencies can do for you, check this out.
Lower Your Credit Card Debt
If you have a lot of credit card debt, make an effort to pay off as much as needed to bring your credit utilization ratio under 30%. If possible, try to pay your credit card balances off in full. And whatever you do, don’t take out any more credit card debt by applying for new cards. Opening up too many new credit cards can harm your chances of getting approved for a second mortgage with bad credit.
Read this for more information about credit inquiries.
Scope Out Bad Credit Mortgage Refinance Companies
The lender you choose to work with can make or break your chances of getting approved for a refinance. While conventional lenders are not known to approve borrowers with sub-par credit, there is almost always a lender out there willing to lend to those with bad credit. Having said that, you will likely have to pay a higher interest rate in order to borrow on a second mortgage if you have a low credit score. Use a mortgage broker to help you find the right lender who will offer you the best rate for your particular circumstances.
After owning a home for a while, you’ll accumulate a certain amount of equity in your property. And if you’ve managed to build up a lot of equity, you just might be able to put it toward a large expense. But if you’ve got bad credit, refinancing might be a bit more of a challenge.
When is the best time to buy a house? Find out here.
To refinance a mortgage with bad credit, be sure to work with a lender who deals specifically with low credit borrowers and take steps necessary to increase your credit score. That way, you’ll have a much easier time getting approved for loan products with better rates in the future.