Sunday, September 13, 2009

Should You Use a Home Equity Loan to Pay Off Credit Cards?

With credit card interest rates rising right through the roof, some homeowners may be wondering whether a home equity loan or line of credit (HELOC) is the way to get their debts under control. The answer is a definite maybe.
While it's much harder to tap your home equity than it was in the past, it's not impossible. Yes, credit is much tighter in general these days, the decline in home values in recent years means that many homeowners no longer have any home equity to draw upon and banks are concerned about possible further declines in home values.
But many homeowners still retain considerable equity in their homes, particularly those who don't live in states like Florida, Arizona, Nevada and California, which have borne the brunt of the housing market decline. Such homeowners continue to be attractive clients for lenders. And many homeowners retain untapped credit in their HELOC, which is still available for them to draw upon.
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The question is, should they? They are some very attractive reasons for doing so. To begin with, a home equity loan or HELOC will very likely have a much lower interest rate than what many credit cards currently carry. In some cases, the rate on a home equity loan or HELOC may be one half or one third of the 17 percent to 24 percent currently charged on many credit cards - many of which were charging a mere 5 or 6 percent a few months ago. On a balance of $5,000, $10,000 or more, that's a hefty savings.
As mortgage interest, interest paid on home equity loans and HELOCs is also tax-deductable, up to a point. A couple can currently deduct the interest on up to $100,000 in home equity loans, and even more if the loan is put into home improvement.
So yes, it's possible to save a lot of money by borrowing against your home equity to pay off credit card debt. But many financial advisers say it's still a very bad idea.
A HELOC is secured debt
For one thing, you're trading unsecured debt for secured debt. Your credit card debt is unsecured - if you can't pay it off, there's nothing the lender can do to you, other than report you as a bad credit risk. However, any time of mortgage debt - including a home equity loan or a HELOC - is secured by your home.
If you can't make those payments, the lender is entitled to take your home. And particularly in the current economic climate, that extra $10,000-$20,000 you take out to pay off other debts could be the difference between mortgage debts that are manageable and those that are not should you or your spouse become unemployed or otherwise suffer a loss of income.
Another reason financial advisors recommend against using home equity to pay off credit cards is that it encourages continued dependence on deficit spending. Too often, the reasoning goes, someone who wipes out their credit card debt finds it too easy to start running them up again - after all, there's a zero balance and a few small charges won't matter. Pretty soon, they've run their balance back up again and now must contend with the twin perils of credit card debt AND a home equity loan tacked onto their regular mortgage.
Back into the credit card debt trap
This is how many homeowners got into trouble in the current housing crisis. Some people, it seems, are addicted to debt - they can't avoid the temptation of those seemingly insignificant purchases that quickly pile up into big balances on a credit card. For them, tapping a home equity loan doesn't so much provide them a way to get a handle on their debt as it does wipe the slate clean so they can start all over again! Only they're not yet done with their previous debts...
If you do take out a home equity loan to pay off your credit cards, take them out of your purse or wallet and put them away, so you're not tempted to use them for spur-of-the-moment purchases. Many experts advise that you actually cut them up at this point, so they can't be used, but you'll want to retain at least one for emergency expenses, such as a major care repair or as a reserve while traveling. But most of the time, keep it put away to avoid the temptation.
Tapping a home equity loan or line of credit can offer considerable savings for homeowners burdened with credit card debt. But only if they're disciplined enough to keep a lid on future expenditures and not fall back into the same credit trap.

Friday, March 13, 2009

What Do Lenders Consider During the Home Mortgage Approval Process? [By Nathan Navachi]

This article will give you a perspective through the eyes of a bank or financial institution so that you can know what they are looking for when it comes to deciding whether or not somebody is considered a trustworthy borrower, and what goes into the mortgage preapproval process.
The Difference Between Prequalified and Preapproved
While people will sometimes use the words prequalification and preapproval interchangeably, these two words do not mean the same thing and it is important to understand the difference.
Prequalification means that you have met with someone at a financial institution and discussed the particular issues of your personal finances such as your income, assets, commissions, and debts, and from that discussion the lender has offered an educated opinion as to how much money you are qualified to borrow.

Preapproval is a much more in-depth evaluation where the financial advisor will actually go over your paperwork such as past paychecks and pay stubs, tax forms such as W2's and 1099's, bank statements, credit reports, and any assets that are owned. After this evaluation you will receive a letter from the lender that specifies how much money you are allowed to borrow pending a good review of the property to be purchased.

What Type of Paperwork Does The Lender Look For?
One important thing that your financial institution will look for when deciding whether they should or shouldn't give you a loan is your credit score and past credit history. If you have a good history of paying back you credit cards on time, especially if you can spend $10,000 or more in a month and then pay it off rapidly, this is a good signal of financial competence.
So what to do if you have a low credit score or an unattractive credit history? Start by not charging anything more, and then pay off all your credit card balances down to zero. From then on, only charge on your credit cards what you have the money in the bank to pay off immediately.

Lenders will also consider your income over the past months and years by reviewing your paychecks and pay stubs, and they will also look for your tax forms to verify your income. They will want to see the paperwork for your other bank accounts or investment accounts so that they can verify your current assets and work that number into the total evaluation.
Also important is your current outstanding liabilities such as credit card debt or other loans. With all of this information, plus any other information deemed appropriate to your personal financial picture, your bank will decide how much money they would be willing to lend you for a home loan.

Nathan Navachi is an expert in the mortgage industry and specializes in mortgage refinancing information. You can read more of his expert advice at

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Falling Home Prices Impacts more than Home Equity [By:Catherine Brock]

The impact of falling home prices on home equity values has been well documented; but now, other areas are being affected, as well.In the board game Mouse Trap, a crank-operated device sets off a series of events that ends with one player getting stuck in the trap. Today's real estate industry seems to have its own game of Mouse Trap going on, as falling home prices create unexpected consequences that can catch homeowners, local governments, renters, and property investors off guard. Incredible shrinking home equity Through the end of September 2008, the Standard & Poor's/Case-Shiller home-price index had fallen more than 23 percent since its highpoint in 2006. That equals an average decline of $23,000 for every $100,000 of original home value. The impact on household home equity has been striking; existing home equity credit lines have been cut or canceled, and thousands of homeowners have fallen underwater on their first mortgages. Existing homeowners and new homebuyers are also facing opposition from lenders in securing equity-based financing going forward. Property tax appeals galore Declining home values carry at least one silver lining in their clouds: lower property taxes. Homeowners may get an automatic reassessment, but it's more likely that they'll have to appeal to realize such savings. The amount of the reduction will vary, depending on when the property was last assessed. New homebuyers won't see a huge difference, but those who purchased in 2005 and 2006 could come out with a substantially lower tax bill. Unfortunately, these savings will come at the expense of local governments. Already, many agencies are cutting services, laying off employees, and imposing furloughs to adjust to changing economic conditions. Further reductions in property taxes will widen those budget shortfalls. Rental market madnessThe home rental market is getting a nice boost from anemic home values-mainly because no one wants to sell their property when market prices are so weak. People who don't have to sell are choosing to take rental income while they wait for property values to recover. Existing rental property owners are feeling the extra competition as more homes become available for rent. At the end of January, The New York Times reported that rents in the Big Apple were dropping fast. Landlords in other smaller communities, however, are still reporting steady demand from well-qualified renters. A combination of factors may be contributing to this trend, including the unstable housing market, uncertain job outlook, and a tight lending environment. Those who feel that buying a home right now is a touch scary are content to rent until economic conditions change. Sliding home prices have set a lot of wheels in motion, and those wheels are impacting far more than home equity values. Local governments, renters, and property investors, as well as homeowners, are going to feel the brunt until this housing market recovers.

Your Free Annual Credit Report - Who Looks at it and Why [By Jeremy Englewood]

Did you know that if you're applying for a new job or are being considered for promotion, your employer (current or prospective) can ask to see a copy of your credit report? Here's a list of entities that are allowed to request for your report and what they use it for:
Current and prospective employers. Many employers are now requesting for copies of their employees' credit report to conduct background checks, and when considering an employee for promotion or reassignment especially for key or sensitive positions. Before they can get a copy of your credit information, however, employers must get your written authorization and provide certain disclosures.
Government agencies. If you have applied for public funding assistance, government agencies may request to see your credit report to check if you are eligible for funding. Their purpose is to see if you have other sources of income or have any assets they're not currently aware of. If you have kids and are in the midst of a divorce, state and government officials may get a copy of your annual credit report to see if you can make child support payments.
Insurance companies. If you apply for an insurance policy, the insurance company can ask to look at your report in order to check your medical history or see if you have filed health insurance claims in the past.
Collection agencies. Collection agencies can look at your report if they are trying to collect an overdue debt from you. Their purpose is to find out what assets you have. Judgment creditors will also want to look at your report to decide if they will begin collection efforts against you.
Potential creditors. If you have applied for credit, credit companies and lending agencies will usually look at your free annual credit report to see if your credit score is high enough and if you have a good payment history on your other debts and revolving credit accounts.
Landlords and mortgage lenders. Because a home mortgage or rent arrangement is a long term endeavor, mortgage lenders will scrutinize your report before lending you money to buy a home.
Utility companies. Utility companies may ask for a copy of your report from a credit bureau in order to get a picture of your payment history and habits. Your free annual credit report may be a deciding factor on whether you will be allowed to subscribe to certain monthly plans or not.
Grant and student loan lenders. If you're applying for a grant or a private student loan, the lender may ask to see your report in order to check your ability to pay.
Your credit report is a confidential document. While the Federal Credit Reporting Act places certain restrictions on who can get a copy of your report, you should periodically get a copy of your annual credit report free and check to see whether unauthorized parties have been given access to your credit information.
Check out our website for articles on how to get your annual report for free and other useful advice on credit repair. You'll find a wealth of practical and valuable information on credit repair and other personal finance topics.
Jeremy Englewood is a credit manager and writer with over fifteen years experience in the banking industry. His sensible and practical advice on personal finance topics have provided inspiration to people who want to establish or repair their credit. You can read more of his articles and advice on your free annual credit report at
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