5 tips on improving your credit score with bad credit home equity loan 

A home equity loan can help repair your poor or bad credit history.  Your first step is to find a competitive lender with affordable equity loan rates and terms.  Next, work towards establishing a solid credit history to enable you to lower your interest rate on future loans.

1.   Apply the 3-question formula -- even before you begin your first step of finding a competitive lender, you must answer the following 3 questions very honestly:

The 3-question formula a.  what do you need the loan for? b.  how much loan do you need? c.  how are you going to repay the loan?

Since your goal is to get rid of your bad credit history, you should use the home equity loan as a debt consolidation loan to pay off all your other more expensive loans, eg credit card debt, auto loan, etc.  You should not use your loan on things like your dream vacation or a luxury car (a depreciating asset).  However, you may use your loan on your home improvement that will enhance the market value of your home.

After identifying what you will spend your loan on, you must determine how much money you need to borrow.  You don't have to borrow the maximum possible amount, ie you don't have to cash out all your available equity in your home. Borrow only as much as is necessary to achieve your goal of eliminating your bad credit history and carrying out a home improvement, subject to your answer to your third quetion.

The third question -- how are you going to repay the home equity loan -- evaluates  your ability to repay the loan.  You may not even be able to "borrow only as much as is necessary to achieve your goal of eliminating your bad credit history and carrying out a home improvement" if this amount is beyond your ability to repay.  You may have to modify your plan.  For example, you may have to forgo the home improvement, and use the loan for debt consolidation only.  In this way, you will not over-borrow to get yourself oppressed by heavy financial burdens. 

To assess your ability to repay the loan, don't just consider the size of your income.  You must do a budget analysis.  The budget analysis need not be a complex one.  A simple one that lists down your monthly income and expenses, taking into consideration any increase or decrease in income and expenses in the foreseeable future, may serve the purpose.

You may not want to borrow such a large amount as to stretch your loan repayment capacity to the full.  You don't want to live a hand-to-mouth existence, do you?  Give yourself some "financial breathing room"  by borrowing prudently.

This 3-question formula looks simple and obvious but is extremely important and effective for managing your finance smartly, keeping you out of financial disasters.  You will be surprised how few people use this common-sense approach.

2.   Shop for a mortgage lender -- if your 3-question formula gives you the green light to go ahead to apply for a home equity loan, compare equity loan rates of mortgage lenders.  An equity loan rate that is even half a percent lower can save you hundreds over the course of your loan.  So, take the time to look at as many mortgage lenders as possible.  Look for these sources on this site.

When you compare equity loan rates from various mortgage lenders, be sure to take into account the relevant costs of the loan such as points and fees.  Points are charges levied by the mortgage lender or mortgage broker based on the loan amount.  Each point is 1% of the loan amount.  For example, 2 points of a $100,000 mortgage is $2,000.  Points can also include a loan origination fee, which is usually 1%.  A loan origination fee is imposed by the mortgage lender for processing your loan, payable at closing. Every loan will have some form of points and fees since this is how mortgage brokers are paid, but they can vary widely between mortgage companies.  So, shop wisely and diligently.  Look for their sources on this site.

You must read Mortgage brokers - what you should know about them.

3.    Go online -- Shopping for mortgage lenders online save you a lot of time.  Mortgage brokers' websites can now send you home equity loan rate quotes from several mortgage lenders after you enter your information through their websites.  It is a no-risk way of looking at your financing options. Look for these sources on this site.

4.   Lock in rates -- It is wise for you to ask the mortgage lender to make an interest rate commitment.  It is also known as a rate-lock or rate lock-in. It is a lender's written promise to hold for you a certain interest rate and a certain number of points, usually for a specific period of time (known as the lock-in period). You may be able to lock in the interest rate and number of points when you file your home equity loan application, during processing of the equity loan, when the loan is approved, or later.

A lock-in at equity loan application can be useful because it may take a few weeks or more to prepare, document and evaluate your loan application. During that time, if your interest rate and points are locked-in, you would be protected against rate increases while your application is processed. But, a locked-in rate could also keep you from taking advantage of rate decreases.

The lender may charge you a fee for the rate lock.

5.   Build your credit history -- after getting your home equity loan, you can begin to repair your bad credit history.  If you have followed tip #1, you will have had a good game plan to shed your bad credit history.  Execute your game plan with commitment and discipline to build a good credit history.

Most mortgage lenders look at the last three years of your credit history, and so executing your game plan faithfully and you can kick away your bad credit history easily.

After three years of a good credit history, you can consider refinancing your home equity or first mortgage loan for a better interest rate.  By then, your strong discipline will have become your second nature, and you will be in absolute control of your money rather than being controlled by debts.

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