Bad Credit Mortgage: Is It Smart to Apply for One?

Financial emergencies come every once in a while. And if you do not have cash that you can readily pull out from your bank account, you have no place to go but to put your assets on the line. And most of the time, it is your home that is in danger. However, getting emergency fund using your home as collateral might be a smart move at the same time, a dangerous one.

Why smart?

As compared to other types of bad credit loan particularly the unsecured loan, bad credit mortgage can have lower interest rate since the lender will certainly retrieve the money you borrow from them in case you were not able to pay them in cash. They will simply have to repossess your home.

Another good thing about bad credit mortgage is the option.

Now, most unsecured loan vehicles can only cover particular price bracket. Mortgage will certainly take you further in terms of financial relief. This is because borrowers can give you 2 options: the Home equity line of credit (HELOC) and the fixed-rate loan.

Home equity line of credit (HELOC) or simply known as home equity provides you with a loan equivalent to the amount of equity you have in your home. This type of loan works like a credit card wherein you are provided with a credit limit that serves as your revolving fund. It allows you to spend the amount you want provided that it is within your pre-determined credit limit. Some borrowers will even give you a card that you can use as a means of purchase.

The fixed-rate loan on the other hand works like a traditional loan. This is more often called second mortgage. When you apply for this loan, you will receive a lump sum payment that is equivalent to your equity. This loan is paid back under a determined time and fixed amount. What is good about this loan is that you will pay a uniform amount throughout the payment period regardless of the inflation or economic situation. This loan can be used best if you are trying to consolidate your debt or need to pay a big amount of debt.

That is not all, you can buy a house using bad credit mortgage loan. It is simple: you find a house, find an institution that would lend you money to buy it, and pay them in installment (principal and interest.

Okay, what about the "bad credit" in the bad credit mortgage?

Bad credit means you missed paying several bills on time and probably have several other unpaid bills until today. Bad credit does not come overnight. It cooks over a period of years and cannot be change overnight as well.

Bad credit means higher interest rate. Okay, we said that bad credit mortgage has lower interest rate. Read it again: "as compared to other types of bad credit loans particularly the unsecured loan, bad credit mortgage can have lower interest rate." Take note of the phrase "compared to other types of bad credit loans." This means that there will going to be lesser institution that will accommodate you. And these institutions will offer you higher interest rate.

Meanwhile the question of smartness would all depend on two things: your capacity to pay for the long term fee and the urgency of your financial need.

The simple rule is, improving your credit rating first before you take mortgage loan is the smartest way to do. But if need immediate money, make sure that you have the capacity to pay for it.