How to tap home equity

Homeowners who want to take advantage of the equity they’ve built up in their home may have to consider alternatives to the traditional home equity loan and home equity line of credit.
Home equity loans and lines of credit, or “HELOCs,” tap the homeowner’s equity and can be used to make home improvements, consolidate other debts, pay off medical bills or help to finance a college education, among other needs.
In today’s market, however, HELOCs have become much more difficult to obtain. Lower home values have reduced many homeowners’ equity, and some lenders have decided to limit their risks on these types of loans. That means some homeowners may want to consider alternatives to a home equity loan or HELOC to access their home equity.
Alternatives to home equity loansOne alternative is a cash-out refinance, which allows you to refinance your first mortgage and take out cash for other financial needs.
Here’s how a cash-out refinance works:
Suppose your home is worth $250,000, and you owe $150,000 on your mortgage. Rather than try to get a HELOC with a limit of, say, $30,000, you could refinance your mortgage with a new $180,000 loan and get $30,000 cash that way.
Since a cash-out refinance is a new loan, you’ll have to pay closing costs, and you’ll have a new loan term, typically 15 or 30 years. Of course, you can pay off the new loan sooner if you’re willing to make higher payments at least some of the time.
Cash-out refinance may offer a lower interest rate
A cash-out refinance doesn’t offer the flexibility of a HELOC, but the interest rate on a new loan may be lower than the rate you’d be offered on a second mortgage, and both the interest rate and monthly payment on the new loan may be fixed, rather than adjustable. Most HELOCs have an adjustable interest rate, which means the rate and payment can change. Depending on the terms of your existing loan, you might have a lower payment on a new loan even if you cash out equity.

Legal to use home equity for student loan

It's not illegal for your parents to repay your student loans with their home equity line of credit and for you to make loan payments to them. You'll lose any tax deductibility of the interest expense, although your parents may benefit from the deductibility of the HELOC interest expense.
There are a couple of other things to consider before taking this approach. For starters, your parents' credit score may go down because of the increased utilization of the HELOC.
Also, the HELOC interest rate is a variable rate, typically at a spread to the prime rate. You can track the prime rate on Bankrate's Rate Watch page. The prime rate is currently 3.25 percent, which should mean your parent's HELOC is priced at prime, less 0.25 percent.
While there are no immediate concerns over rising short-term interest rates, the rate can't go much lower, leaving it nowhere to go but up. How long will you take to pay off the loan?
Your parents should also review the HELOC documents. A typical HELOC has a limited number of years the borrower can draw against the line of credit. At the end of that draw period, the line becomes an amortized loan, with payments high enough to cover the interest expense and pay off the loan over a 10- to 20-year term.
Some HELOCs are structured to have a balloon payment at the end of the draw period. A balloon payment structure would not be beneficial to you or your parents.
Your parents have pledged the value of their home as security for the lender. At a minimum, you should have a loan agreement in place with them as you borrow to restructure student loan debt.
There are some IRS-related concerns when making loans to family members. The law is nuanced enough that I'm going to recommend your parents work with a tax professional in structuring the loan so as to manage any interest income and gift tax considerations that could come into play.

bad credit home equity loan

When used properly, a bad credit home equity loan may help you improve your credit rating. A home equity loan allows you to tap into your home’s built-up equity, which is the difference between the amount your home could be sold for and what you owe on your mortgage. Also referred to as a second mortgage or borrowing against your home, these loans generally have some of the lowest interest rates a borrower can get. Plus, the interest you pay on a home equity loan is usually tax-deductible. But, remember, you are using your house to secure this loan, which means you could lose your home if you fail to make your payments on time. If you have bad credit and are planning on taking out a home equity loan, follow these tips:
Contact your lender
Though your lender may have home equity loans available for people with low credit ratings, you might not get the best features. Usually the lowest interest rates and the highest limits are reserved for the people who have the best credit scores. So, if you get a home equity line of credit with bad credit you might end up paying more in interest to offset your lender’s risk if you fail to make payments.
Consider the consequences of not keeping up with your responsibility
If you have a low credit rating due to late payments or high debt, you will have to consider what is at risk with a home equity loan. Taking out a home equity loan means the lender can take possession of your home if the loan isn’t repaid. This is why some people decide not to borrow against their home and to take out a personal loan instead. But for many borrowers, a home equity loan can be the best loan option. Keep in mind that a home equity loan adds to your debt, which also adds to your financial responsibility. Be sure to make the decision that is best for you and your financial situation.
Make a commitment to yourself to clean up your credit
Rather than perpetuate the cycle of debt, devise a plan for getting back in good financial standing. Pay your bills on time, make more than the minimum payment on your credit cards, and stop making impulse buys that you can’t afford. That way you can improve your credit score and possibly refinance with more favorable loan terms in the future.