Home buyers – Determine your mortgage affordability

By Pablo Gibson, financial writer for Safe Financing.

Everyone dreams of owning a house of their own at some point of time in life. In order to fulfill this dream, people take out mortgage loans to purchase a house. These loans come at varying rate of interest as well as terms of repayment. There are times when home buyers jump into a decision to take out a mortgage loan without asking themselves ‘how much house can I afford’.

So, it is very important that every home-buyer is well conversant about his capacity to service a mortgage loan efficiently.

Factors that influence mortgage affordability

Here are the factors that will determine how much a person can afford to manage a mortgage loan competently:

  • Debt liabilities – The amount of debt liabilities is a crucial factor that reveals the capacity of a person to manage timely loan payments. In order to arrive at a conclusion regarding a person’s mortgage affordability, lenders make use of debt-to-income ratio. It is a ratio that reveals how much of the monthly salary earned by an individual is spent in making the debt payments. This is known as back-end ratio too. Ideally, debt-to-income ratio must not be excessive of 36% of a person’s monthly salary.
  • Private mortgage insurance (PMI) – People, who can’t make huge down payments (for example 20% or more), then they will have to pay for private mortgage insurance along with the monthly loan payments. Federal mortgage loans like the FHA or VA, however, have very low down payments.
  • Mortgage interest rate – The rate of interest levied on mortgage loans is another key factor in deciding an individual’s mortgage servicing capacity. Difference in mortgage rates will greatly influence the monthly payment amount. So, it is best to have several mortgage quotes and weigh all the pros and cons of a particular type of mortgage loan before signing the loan papers.
  • Loan processing charges – These are also known as closing costs. It is the expense incurred by the lenders as well as the borrowers to successfully close a mortgage deal. Attorney fees, mortgage underwriter’s fees, market research charges, legal paper work costs, home appraisal costs and so on are considered as closing costs. As a result, a typical mortgage loan may have a closing cost of around 2-7% of the selling price of a home.

Last but not the least, a person’s monthly mortgage costs must not exceed beyond 28% of the entire disposable income. This is known as front-end ratio, which is of utmost importance to the lenders in deciding how much mortgage one can afford.

US Government pushing loan forgiveness for “underwater” borrowers

There is some relief coming from the Obama administration for home owners who owe more on their properties than their homes are worth.

 The Federal Housing Administration will begin permitting lenders to give refinanced loans backed by the government as of this Tuesday. In return for the government’s backing, the lenders will be required to forgive at least 10% of the original mortgage amount. Investors who have control over the mortgages as part of their large portfolios will select which borrowers are invited to participate.

This is the latest effort by the administration to address the housing bust. Homeowners who had been taking on debt to support a lifestyle built around the assumption of increasing value in their equity have been in an impossible quandary since the contraction of the investment markets, the economy and housing prices. These homeowners are referred to as “underwater” borrowers because their debts and interest obligations exceed their income and equity- they are simply drowning in their debts. The challenge for the administration is too keep the homeowners under a roof and still making payments to their brokers.

The Obama administration expects between 500,000 to 1,000,000 homeowners could benefit from the program. However, analyst suggest the execution of this plan will be challenging. Nearly half of the 1.3 million homeowners enrolled in the Obama administration’ main mortgage-relief program have already fallen out because of lost paperwork and complaints that the program is a bureaucratic nightmare. The new refinancing program allows investors in mortgage-backed securities to evaluate their holdings and select borrowers that will bve offered refinanced mortgages guaranteed by the FHA. The hope is that loans that investors want to foreclose on will be instead be refinanced through the refinancing program.

Homeowners owing 40% more than the value of their homes may not find 10% enough enticement not to walk. Investors may prefer to foreclose on a homeowner with a high risk of default.

The program is funded with $14 billion from the Obama administration’s existing $75 billion mortgage assistance program. That money will be used to cover incentive payments to lenders and losses from borrowers who fall back into foreclosure.

The plan is limited to loans in which homeowners owe at least 15 percent more than their home’s current value.

Canada’s housing market- Who might be in trouble and what can be done?

life lineCCPA Research Associate David Macdonald is the author of the study showing that, for the first time in 30 years, six red-hot real estate markets are in a synchronized housing bubble. The Centre’s Trish Hennessy interviewed the study’s author to learn more about the problem.

Here’s an excerpt from the interview:

 Trish Hennessy (TH): We know the American housing market collapsed in the wake of the subprime mortgage crisis a few years ago but Canada’s housing market has been viewed as relatively healthy. Your study on Canada’s six hottest real estate markets indicates our housing market might not be as rosy as we think. What’s your diagnosis?

David Macdonald (DM): I think Canadians have come to expect that their houses will increase in value by 5% to 10% a year and the truth is, like the U.S., that kind of return on investment simply can’t continue indefinitely. Record-low mortgage rates and deregulation of the Canadian housing market means that housing prices are getting far outside of their historical “comfort zone.” My concern is that when we get outside of that zone, housing prices become much more volatile and can be affected quite dramatically by changes in mortgage rates.

TH: Canadian housing prices may be out of their comfort zone, but is the problem worse in some cities than others?

DM: Definitely. Edmonton, Montreal and Vancouver are particularly at risk. Sleepy housing markets like Edmonton and Montreal exploded around 2002, with prices rising from about 3 times the provincial median income to 4.5 times in less than a decade. The third threat — Vancouver — did not experience as big a percentage increase (housing prices there were sky high to begin with), but homeowners in that city may be poised to experience a much larger dollar loss if mortgage rates increase.

TH: So, if I own a home in Edmonton, Montreal, or Vancouver how worried should I be?

DM: I’d be pretty worried. The historical perspective suggests housing markets that went up the most have the most to lose. It is really mortgage rates that will define when housing prices start to fall and how quickly. Every housing bubble in Canada since 1980 has been burst when mortgage rates when up by more than 1% above their two-year average. We aren’t close to that tipping point right now and we may stay safely below it in the short term — say the next 6 months to a year — but that doesn’t mean that the situation is stable in the long run. On the bright side, those who owned a home before 2002-03 will still see a modest appreciation in the value of their home, even following a crash under the worst-case scenario. (Worst-case scenario being a widespread housing market collapse like what happened in the United States post-subprime mortgage fiasco). On the down side, homeowners who bought their house after 2002-03 are more at risk.

TH: Many Canadians have bought a home — and assumed hefty household debt — with the notion that home ownership is a form of financial security; that if things go badly in the labour market or whatever, at least you have a house to sell as financial insurance. In fact, a lot of Canadians count on selling their home to ensure a good retirement. Are we right to think this way or is this a potentially dangerous game?

DM: Owning a home certainly can be a useful means of forcing one to save and accumulate for retirement. What is shocking is how quickly Canadians assumed that housing prices would continue to increase at 5% or more a year. Instead of a place to live and raise a family, a house has become the latest investment craze. Just as Nortel was once seen as a sure winner that couldn’t fail (and many an investor got a great shock there), the housing market craze is equally vulnerable to downturn. Unfortunately, Canadians are taking on far too much debt to get into the housing market now. I can only hope that smart policies are put in place quickly to let air out of housing bubble slowly — otherwise, a lot of Canadians could get burned.

TH: What can we do to stave off a major housing bubble burst?

DM: First of all, the government, through CMHC, can slowly curtail the 35-year mortgages that it insures. Prior to 2006, the maximum amortization period was only 25 years and we should return to that level. Second, the banks have a big role to play. When — and if — the Bank of Canada starts to raise interest rates, the big banks need to maintain a slow and measured increase in their mortgage rates, even if it means a hit to their billion dollar profits. If the banks shock a precarious housing market with a large mortgage rate increase, Canadian homeowners will almost certainly shoulder a dramatic drop in average house prices. The pressing need for these changes to Canada’s housing policy should help to drive home the message that a house is where we live — it shouldn’t be speculative investment.

To find out more and to view the article in its entirety, go to http://www.policyalternatives.ca/publications/commentary/look-canadas-housing-market

Conflicting predictions of the Canadian housing market

homeThe CMHC on Tuesday predicted that housing starts in Canada should rise moderately this year, while two research groups, the CCPA and the CD Howe institute have both examined the possibility of a housing bubble in Canada.

Canada Mortgage and Housing Corp (CMHC) said in its outlook that it expects housing starts of 184,900 units in 2010, slightly ahead of its May outlook for 182,000 units.

There were 149,081 starts in 2009.

For 2011, CMHC forecasts 176,900 starts, down slightly from the 179,600 it forecast in May.

For the existing-home market, CMHC chief economist Bob Dugan forecast 450,000 to 485,700 resales in 2010, with a specific prediction of 463,800. For 2011, he sees 425,000 to 490,700 resales, with a specific forecast of 456,000.

CMHC did not provide a forecast for an average price but said it would “edge lower” through the end of this year then rise modestly in 2011.

The CMHC forecast follows data earlier this month that showed housing starts fell for a third straight month in July, while sales of existing homes fell 6.8 percent in the same month, offering further evidence the recently hot housing sector is no longer playing a starring role in the economic recovery.

The recent data, which followed the implementation of stricter lending rules and higher interest rates, has deflated talk of a housing market bubble.

But on Tuesday, the Canadian Center for Policy Alternatives (CCPA) released a report saying there is still a risk of a housing bubble in six markets.

After examining trends in home prices in Toronto, Ottawa, Vancouver, Calgary, Edmonton, Montreal, between 1980 and 2010, the independent research group found price increases in those cities were “outside of a historic comfort level”.

“The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” says the report’s author, David Macdonald, a CCPA research associate.

In a worst-case scenario, the report predicted homeowners in Edmonton and Montreal could be hardest hit, losing 38 percent and 34 percent, respectively, of their property value in under three years. Vancouver homeowners would be hit worst by dollar value, losing almost C$200,000 ($187,793).

The think tank found that house prices tended to hover within a narrow range of between 3 and 4 times the annual median income in the relevant province, before 2000. Currently, home prices are 4.7 to 11.3 times the median income, the CCPA report said.

Another think tank, the C.D. Howe Institute found that national housing policies have “worked well” and should help mitigate the risk of a massive wave of defaults in the future.

“To evaluate the likelihood of a U.S.-style housing market crash in Canada, one first needs to understand what caused the U.S. housing boom and bust,” Jim MacGee, an associate professor of economics at the University of Western Ontario, wrote in the C.D. Howe report.

Tighter underwriting standards were a main factor that has protected the Canadian housing market, compared with the United States, which saw high-risk mortgages eventually lead to a rapid increase in foreclosures, the report argued.

“This difference in government policy has helped to discourage the build-up in Canada of a large number of high-risk mortgage loans,” the report said, adding that policymakers would be well-served to remember these lessons should “pressures to relax underwriting standards reoccur in the future.”

Housing bubbles in Canada and the CCPA

The Canadian Centre for Policy Alternatives has stirred up talk in Canada of a possible housing bubble. In their report titled “An accident waiting to happen”, the CCPA reports that the housing markets in six major real estate markets in Canada are in danger of a very large adjustment: as much as a 38% drop in value over the next three years.

The CCPA report states Canada has had only three housing bubbles burst, twice in Vancouver and once in Toronto. The report focuses on the two most recent bubbles, as well as the 2006 housing market collapse in the USA, to assess how bad a correction might be. The report sets out three scenarios. The first scenario is a market correction through housing price deflation. The second scenario, a slow burst of the bubble over a period of time, would shield consumers from the shock of the decline, but result in the largest correction. The worse-case scenario is a rapid burst of the bubble- a meltdown of the housing market.

The CCPA has the report available at this address:


For more information on the CCPA, the following information has been pulled from their website.

The Canadian Centre for Policy Alternatives is an independent, non-partisan research institute concerned with issues of social, economic and environmental justice. Founded in 1980, the CCPA is one of Canada’s leading progressive voices in public policy debates.

We have a National Office in Ottawa, and provincial offices in British Columbia, Saskatchewan, Manitoba, Ontario, and Nova Scotia.

Original, hard-hitting research

We work with top-notch researchers to shed light on the key issues facing Canada. Whether it’s the push to privatize our health care system, the growing gap between the rich and the rest of us, or gas companies gouging us at the pump, we set the record straight.

Balanced debate

CCPA research doesn’t just sit on a shelf gathering dust. Every month, we are featured in hundreds of media stories. The CCPA is a strong and credible voice in news about issues like how to deal with surgical waitlists in health care, how we should use provincial and federal budget surpluses, the high number of Canadian military casualties in Afghanistan… and many others.


The CCPA debunks myths—like the myth that an aging population will cripple public health care, or that meeting our climate change obligations is a job-killer. Our monthly magazine, The Monitor, is packed with facts and analysis that will help you untangle the spin.


We don’t just analyze problems. We work on solutions—solutions that show Canadians’ best values are not only possible, they’re practical. These ideas are anchored by some basic principles: human dignity and freedom, fairness, equality, environmental sustainability, and the public good. They show that we can afford to build a more just and sustainable Canada—and that our economy will be stronger for it.


The CCPA is a registered non-profit charity. We depend on the support of our more than 12,000 members across Canada.

 You can find out more about the CCPA here: http://www.policyalternatives.ca

Home Refinancing Basics

handshakeThis article describes the advantages and perils associated with refinancing.

Before You Start:

  • Remember that refinancing to reduce debt can be a smart move, but refinancing in order to borrow more for consumer purchases could set you back significantly.
  • Read the fine print on your current mortgage to learn whether you’ll be assessed penalties or fees for “getting out” of that loan early.
  • Make sure you know whether you have a fixed or variable interest rate and what the terms are.

Home Refinancing Basics

Refinancing can potentially help you reduce the costs associated with borrowing money to own a home. Refinancing is not necessarily a strategy that makes sense for every individual in every situation. Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you.

To Refinance or Not

The good rule of thumb to use is that a refinance only makes sense if you can lower your interest rate by at least two percentage points for example, from 9 percent to 7 percent. What really matters is how long it will take you to break even and whether you plan to stay in your home that long. Make sure you understand – and are comfortable with – the amount of time it will take for your overall savings to compensate for the cost of the refinancing.

For an example, let’s say you have a $200,000 30-year mortgage with an 8 percent interest rate and your monthly payment is $1,468. If you refinanced at 6 percent, your new monthly payment would be $1,199, a savings of $269 per month. Assuming that your new closing costs amounted to $2,000, it would take eight months to break even. ($269 x 8 = $2,152). If you planned to stay in your home for at least eight more months, then a refinancing would be appropriate under these conditions. If you planned to sell the house before then, you might not want to bother refinancing.

Remember: All Mortgages Are Not Created Equal

Don’t make the mistake of choosing a mortgage based only on its stated annual percentage rate (APR), because there are a variety of other important variables to consider, such as:

The term of the mortgage – This describes the amount of time it will take you to pay off the loan’s principal and interest. Although short-term mortgages typically offer lower interest rates than long-term mortgages, they usually involve higher monthly payments. On the other hand, they can result in significantly reduced interest costs over time.

The variability of the interest rate – There are two basic types of mortgages: those with “fixed” (i.e., unchanging) interest rates and those with variable rates, which can change after a predetermined amount of time has passed, such as one year or five years. While an adjustable-rate mortgage (ARM) usually offers a lower introductory rate than a fixed-rate mortgage with a comparable term, the ARM’s rate could jump in the future if interest rates rise. If you plan to stay in your home for a long time, it may make sense to opt for the predictability and security of a fixed rate, whereas an ARM might make sense if you plan to sell before its rate is allowed to go up. Also keep in mind that interest rates hovered near historical lows in recent years and are more likely to increase than decrease over time.

Points – Points (or “origination fees” or “discount fees”) are fees that you pay to a lender or broker when you close the deal. While a “no-cost” or “zero points” mortgage does not carry this up-front cost, it could prove to be more expensive if the lender charges a higher interest rate instead. So you’ll need to determine whether the savings from a lower rate justify the added costs of paying points. (One point is equal to one percent of the loan’s value.)

How Much Would You Save?

A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month. The table below illustrates the potential monthly savings and the various break-even periods that would result from refinancing at different rates, assuming the closing cost is $2,000.
Rate After
New Monthly
Months to
Break Even*
7.5% $1,398 $70 29
7.0% $1,331 $137 15
6.5% $1,264 $204 10
6.0% $1,199 $269 8
5.5% $1,136 $332 7
5.0% $1,074 $394 6

A Closer Look at Mortgage Fees

Using data collected during 2003, researchers at Bankrate.com determined the average fees charged to consumers who borrow money to buy a home. Based on a loan of $180,000, the fees broke down as follows:
Average Lender/Broker Fees
Administration fee: $336
Application fee: $205
Commitment fee: $498
Document preparation: $194
Funding fee: $228
Mortgage broker fee: $839
Processing: $320
Tax service: $73
Underwriting: $269
Wire transfer: $31
Third-Party Fees
Appraisal: $327
Attorney or settlement fees: $445
Credit report: $29
Flood certification: $17
Pest & other inspection: $68
Postage/courier: $45
Survey: $174
Title insurance: $605
Title work: $200
Government Fees
Recording fee: $76
Various taxes: $1,339

Stick With What You Know?

Finally, keep in mind that your current lender may make it easier and cheaper to refinance than another lender would. That’s because your current lender is likely to have all of your important financial information on hand already, which reduces the time and resources necessary to process your application. But don’t let that be your only consideration. To make a well-informed, confident decision you’ll need to shop around, crunch the numbers, and ask plenty of questions.


  • The decision to refinance should only be made if the long-term savings outweigh the initial expenses. To calculate your break-even point, divide the cost of refinancing by your monthly savings. The resulting figure represents the number of months you will need to stay in the home to make the strategy work.
  • Don’t select a new mortgage based only on its annual percentage rate.
  • Also evaluate the term of the loan, whether the interest rate is fixed or variable, and the relative merits of paying up-front fees in exchange for a lower rate.
  • Your current lender already knows you and has your financial information on file, so you may be able to get a better deal that way, instead of going to a new lender.
  • To get the best possible refinancing deal, you’ll need to shop around, crunch some numbers, and ask a lot of questions.


  • Shop around and conduct a detailed cost assessment (with a financial professional, if necessary) to identify which mortgage offers the greatest financial benefits.
  • Read the entire contract before signing. Don’t let anyone pressure you or rush you to make a hasty decision.
  • If refinancing results in lower monthly payments, use those savings to pursue other important goals, such as preparing for retirement and college costs.

Home Loan Mortgage Rates at record low but no relief for home owners

Why interest rates are at record lows

Lower bond yields drive mortgage rates lower, so the weak economic data released by the Government this week has sent 10 year bond yields down below 2.50%. Freddie Mack reports 30 year mortgage rates, 15 year mortgage rates and 5 year adjustable mortgage rates all hit new record lows for the week ending September 2, 2010 in their most recent Primary Mortgage Market Survey.

Mortgage rates for September 2, 2010

30 year mortgage rates are averaging 4.32 percent.
15 year mortgage rates are averaging 3.83 percent.
5 year U.S. Treasury indexed adjustable mortgage rates are averaging 3.54

Impact on home refinancing mortgage

10 year jumbo home refinance interest rates are also down averaging 4.99 percent.
7 year adjustable refinance rate mortgages are lower averaging 3.76 percent.

Impact on other debt consolidation options

Current 10 year home equity loan rates are averaging 6.884 percent
15 year home equity rates today are averaging 7.175 percent
The current average home equity line of credit rate is averaging 4.763 percent


Sales of homes may be down by 19 percent compared with a year ago, but signed contracts between buyers and sellers have risen in July by 5.2 percent. Home buyers continue to be very wary of the housing market. Lenders have tightened qualifications for refinancing and the bank mortgage rates are not keeping pace with the drop in other interest rates. The housing market recovery continues to be slow and vulnerable.

The New York Times is pushing in their editorials for the government to investigate ways to facilitate more refinancing. The government has been backing Finnie Mae and Freddie Mack, who hold millions of mortgages from borrowers who are current but unable to refinance because their home equity or credit scores have declines since they first took out their mortgages. The editorial suggests that lower interest rates on mortgages reduce the risk of default, so it would make sense to push for better terms for home owners.

Economists at Morgan Stanley started this debate a month ago while pondering slowing U.S. growth. The economists suggested a “slam dunk stimulus” could be achieved if the government ignored credit checks and made a sweeping qualification of loans it already guarantees through agencies or Fannie Mae and Freddie Mac.

Investors who own securities issues by Fannie Mae, Freddie Mac and Ginnie Mae oppose government intervention in the refinancing market. When a loan is refinanced, it creates a “prepayment” of principal to investors, which will result in a steep loss for the investors.

Ajay Rajadhyaksha, head of U.S. fixed-income and securitized debt strategy at Barclays Capital in New York recently stated, “Policy risk and initiatives by the government are more likely to drive the secondary mortgage market than at virtually any point that I can remember in the last several years.”

This means that if you are a home owner hoping to take advantage of historically low interest rates for debt relief, your best hope is for a government change of policy.

JPMorgan feels that a government intervention is unlikely. Analysts for JPMorgan recently advised clients that congressional action would be required to trigger any significant refinancing in the market for bonds owned or guaranteed by mortgage financiers Fannie Mae and Freddie Mac. JPMorgan is encouraging investors to continue to buy mortgage bonds tied to U.S. home loans because JPMorgan feels the bonds are unlikely to suffer a wave of refinancing that would cut yields.

Refinancing with Shorter Loan Terms

home equity loanFor some homeowners there is the possibility of making a sound refinancing decision even when interest rates are stagnant, the homeowner does not have a great amount of equity in the home and the homeowner’s credit score has not increased significantly. You might wonder how this is possible. It certainly isn’t an option for every homeowner but those who can afford to pay significantly more each month can yield huge financial benefits by refinancing their loan terms from 30 years to 15 years. The benefits which may result from this type of refinancing include a significant overall savings, the ability to gain equity quicker and the ability to repay the balance of the loan quicker.

Higher Monthly Payments Increase Overall Savings

Refinancing with shorter loan terms is definitely not an easy option but homeowners who have a large monthly cash flow or who receive a sizable promotion at work might be able to consider the possibility of refinancing by decreasing the loan terms from 30 years to 15 years.

The result of this type of refinancing will be a significantly higher monthly payment which is not conventional but can be worthwhile if it meets the needs of the homeowner. In particular this type of refinancing option is a viable solution if the homeowner can afford the increase in monthly payments and has an overall goal of reducing the amount of interest they will pay over the course of the entire loan.

Reducing the amount of interest is critical to the overall savings plan because the homeowner does not have the option of reducing their original debt but they can drastically reduce the amount of interest paid over the course of the loan. Consider two loans with a 5% interest rate. One loan is to be repaid over a period of 15 years while the other loan is to be repaid over a period of 30 years. It is clear that in this example, the homeowner with the 30 year mortgage will pay more during the course of the loan.

Equity Gained Quicker

Another major advantage to refinancing by reducing the loan terms from 30 years to 15 years is the ability to gain equity in the home at a significantly faster rate. The amount of the equity in the home is equal to the amount of the principal loan which has already been repaid by the homeowner. Under a conventional loan, the homeowner typically pays a combination of principal and interest with their monthly payments. The amount of the principal which is repaid on two mortgages for the same amount and with the same interest rate will be different if one loan is a 30 year term and the other is a 15 year term. The homeowner with the 15 year mortgage will be paying more of the principal each month and will therefore be accumulating more equity each month. Gaining equity in the home quicker is ideal because it gives the homeowner greater flexibility. The equity in the home can be used for a number of purposes including home improvement projects, travel, educational pursuits and small business ventures.

Loan Repaid Quicker

One advantage of shortening the loan terms, which cannot be denied by some homeowners, is the ability to repay the loan quicker by refinancing to shorten the loan terms from 30 years to 15 years. In this case the homeowner will have completely repaid the home loan a full 15 years earlier than they would have under the conventional loan. This is advantageous because it can enable the homeowners to enjoy living mortgage free a full 15 years earlier. Once the mortgage is fully repaid, the homeowner may be able to make significantly more sizable contributions to his retirement plan. Some homeowners may even be able to afford to retire once their mortgage is repaid in full. This ability can have a significant impact on the quality of life for the homeowner. Homeowners may find themselves with the financial means to travel, assist family in educational pursuits or invest in a small business.

Bad Credit Rating in Home Equity Loans

bad credit

bad credit pushing you around

Home equity loans is one of the quickest, fastest and easiest way in obtaining cash for debt payments, home improvements, education, emergencies and medical expenses. However, you might think that your loan will not get approved because of your bad credit rating in home equity loans. Think again.



Even if you have a bad credit rating in home equity loans you can still refinance your home mortgage loan. You can still get a home equity loan even if you have a bad credit rating in home equity loans. There are some lenders that offer loans to those who have bad credit ratings in home equity loans. Although, the interest rates and loan terms for those who have bad credit rating in home equity loans are less flexible than those who have good ratings. And finding an institution with low interest rates, good terms and no extra fees or charges that caters those who have bad credit rating in home equity loans is very difficult.


Most lenders that provide home equity loans to those who have bad credit ratings are likely to charge additional fees or offer higher down payment. On the other hand, some of these lenders have fixed interest and variable interest rates and some lenders features maximum repayment for borrowers, which usually is thirty years.


Some lenders tend to depend on the reports made by credit rating agencies. These agencies are the TransUnion, Equifax and Experian (collectively known as FICO, an acronym for Fair Isaac Corporation). These agencies evaluate the individual’s credit ratings by considering some factors. These factors include the past payment history, latest credit applications and remaining debts. The credit ratings range from 300 to 900. If an individual has a credit rating of below six hundred, it means that that individual belongs to the bad risk bracket. However, the rating of a certain individual may differ depending on the FICO agency. Some lenders offers home equity loans to individual who are in the middle of the score range.


Many individuals who have bad credit ratings tend to pay higher interest rates on a home equity loan, and these rates can accumulate up to thousands of dollars over the course of the home equity loan. Although, the credit rating can improve after a few years and the individual will be able expected to refinance the home equity loan and will get a better loan terms and deals with lower interest rates. This will depend on the individual’s current interest rates and whether or not the individual will get a fixed rate or variable rate in home equity loan.


It is important to always make sure that you review the home equity loan contract carefully before signing and do not hesitate to ask questions if there are some things that you don’t understand regarding the contract.

What is a Home Equity Loan?

mortgage as equityWhat is a home equity loan? A home equity loan is the one time lump sum you borrowed and intend to pay each month for over a set amount of time, using your home as collateral.


Let me explain in detail. First let me identify the considerable factors involve in home equity loans. Foremost is the collateral. The property you set as a guarantee that you will pay you debt or loan is referred as collateral. The dictionary defines collateral as an acceptable property guaranteed as a security pledge against the performance of an obligation. If you fail to repay the debt, the equity lender can take your collateral and sell it to regain its money back. One example of such is through public auction, where the homeowner has the right to acquire it back first among other bidders. If the last bid can’t sustain to the standing balance of the existing payable, still the creditor has the rights to decline as it would then be a loss on the part of the creditor.


Second significant factor is the equity. Equity is defined as the residual value of a property beyond any mortgage. So exactly, the value is given on how much you have paid for and how much is left standing on mortgage, plus how much is the present value of the house (could be a lot if included in the terms). The difference total would define as the home’s equity.


Rudimentary speaking, as you apply for a home equity loan the bank rate surveyor checks your property (existing market rates). The property would then stand as the collateral. When the worth of the collateral is identified, the existing mortgage balance is then subtracted from the collateral value. The difference would then be the actual home equity loan.


Going back to our first definition, home equity loan is a one time lump sum you borrowed and pay each month. It has fixed interest rates and you pay fixed sum every month. For the duration of the contract, you are not allowed to make another loan until the balance is repaid.


For illustration, let us say that I bought a property worth $500,000 by the seaside. The area was quite uninhabited the time of my purchase in 1995. I made a down payment of $100 and left $400 on mortgage. Over the next five years, with the monthly payments I made, I already got $250 paid but the house worth had risen to $600. Still I have the remaining mortgage debt of $250, but when I checked the Home Equity Loan Status I found it I have a $350 credit value. It’s $600 minus the standing $250.