Home Equity Loans and the Effects On Your Credit Score
By Orlando D. Rodriguez, Professional Mortgage Service, Inc.
Consolidating Unsecured Debt
As far as what debt should be consolidated, it should always be their revolving, unsecured debt.
Home Equity loans are considered revolving debt, but they do not hurt credit if they are maxed out because they are secured. On the other hand, if a customer has a $5000 limit on a credit card and they keep the balance of the card over 50% of the credit limit, their credit score will continually decline even if they make the minimum payment every month. In other words, they could never miss a payment for an entire year and if they’re paying only the minimum payment, they could watch their credit score go down the drain. Most people are in this position. It also depends on how much credit they have open. Assuming they are not making late payments, a home equity loan can give a consumer’s credit score a quick boost. I have seen scores jump 60 to 70 points when their debt gets paid off, which in turn, means better interest rates for their loan.
Consolidating Secured Debt
Car loans and other installment loans don't hurt credit even with high balances, because there is a timeframe of when the loan will be paid off. Generally, people only payoff these loans when they are in a real hardship and they need to get their total monthly obligations down to a minimum. Consolidating all their debt into one loan and amortizing the amount over 30 years will definitely help their outlook.
Qualifying Factors for a Home Equity Loan
All loans are underwritten with a layer of risk. The two basic factors of Equity and Credit determine whether a person qualifies for a home equity loan. And while good credit is the number one factor to securing a loan, if you have terrible credit, but a ton of equity, you are probably just as good of a borrower to a secondary market lender, as a person with perfect credit and no equity.
Other Factors
Always remember that every person’s situation will be completely different from the next, and even though credit and equity may be the same, other factors could make the loan completely different. (i.e. income, time on the job, type of work, and so on.)
Orlando D. Rodriguez
Professional Mortgage Service, Inc.
4700 S. Lindbergh Blvd.
Saint Louis, MO 63126
email. orodriguez@promtg.com
phone. 314.966.2600
