When You Should and Shouldn’t Purchase Mortgage Points

When buying a home, there seems to be a ton of jargon to sort through and an endless sea of decisions to make, especially if you’re wanting to finance the purchase with a loan. Depending on your situation, lenders and real estate agents may suggest buying discount points during the homebuying process. But, what is a “point,” and what does it mean to buy one? If you aren’t sure, you’re not alone. While they’re not a solution for every financing scenario, understanding mortgage points may actually save you thousands of dollars over the life of a loan!

mortgage pointsmortgage points

What Are Mortgage Points?

Mortgage points, sometimes also referred to as “discount points” are fees you pay to your lender in exchange for a lower mortgage interest rate. Essentially, you’re paying more upfront to pay less over time.

While the name uses the term “points,” it’s easier to think of mortgage points as “discount percentages.” The Consumer Financial Protection Bureau explains that each point equals one percent of your loan amount. For example, if your loan amount is $200,000, then one point would equal $2,000, two points would be $4,000, etc. Typically, purchasing a point will lower your interest rate by a quarter of a percent; so, if your $200,000 loan is approved at a 4.5% rate, paying $2,000 upfront could lower your interest rate to 4.25%. Most lenders will also allow you to purchase fractions of points if you desire.

It’s important to note that mortgage points are paid in addition to closing costs and are out-of-pocket expenses for the buyer.

When Should You Purchase Mortgage Points?

While not every buyer can (or should) purchase mortgage points, they are a great solution for many buyers depending on what future plans are. Buyers who intend to stay with the initial loan long term (i.e., won’t be refinancing or selling) could benefit greatly from purchasing them, because they will remain in the loan long enough to recoup the upfront costs of purchasing those points, and save money over the life of their loan.

For example, in the current market, it’s expected that mortgage rates will start to rise by year’s end, and may continue to rise for quite some time. In this case, most homeowners won’t opt to refinance (after all, who wants to refinance into a higher interest rate?), which makes getting the best rate on a loan now and sticking with it long term the more ideal scenario.

When Should You Avoid Purchasing Mortgage Points?

Having a lower interest rate sounds appealing, but purchasing mortgage points may not be the best course of action for everyone. Depending on your loan and unique situation, it could be years before you recoup the costs of purchasing loan points. In fact, depending on the amount of mortgage points purchased, it could take the entire life of the loan to break even on the out-of-pocket expense of the discount points. Plus, if mortgage rates fall and you decide to refinance, any money paid for points on the original loan would become a wasted expense.

The Mortgage Reports cautions, “Paying a fee to lower your mortgage rates might make sense over a 5- or 10- or 30-year time window. But, if you plan to move within a few years; or refinance your loan, you’ll likely never recoup your initial investment.”

In short, if you only plan to live in the home for a few years, buying mortgage points won’t be a worthy expense because you won’t be in the loan long enough to reap the benefits. A better alternative could be to use those funds for a higher down payment.

mortgage pointsmortgage points

What About Other Mortgage Costs?

Another consideration: lenders require private mortgage insurance (PMI) if the down payment is less than 20% of the purchase price. PMI expenses vary from lender to lender, but tend to range from 0.5 to 1.5% of the original loan amount. Using our $200,000 example, that would tack on an additional $1,000 to $3,000 each year until a loan-to-value ratio of 80% is reached.

In this scenario, increasing your down payment instead of paying for points could be the more ideal solution, because it will get you closer to reaching the 80% loan-to-value ratio required to cancel PMI. On that $200,000 loan, increasing your down payment from 5% to 10% would not only reduce your principle (in other words, your money would go straight to the loan instead of the bank), it could also reduce the length of time you have to make PMI payments by almost two years, thus saving you more money.

Mortgage Points are Specific to the Individual

To know if purchasing mortgage points is the best option for you, it’s important to consult your lender to calculate the savings versus cost for your specific situation. An experienced lender will be able to weigh the options of a larger down payment versus paying for discount points, and also help navigate more complex scenarios such as loans for investment properties. In the meantime, if you’re looking for more insights into the mortgage process, visit the Homes.com Mortgage Hub.

Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

Guide to merchant cash advances

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Merchant cash advances are becoming a popular form of credit for all types of businesses. Once a tool offered mostly by credit card companies, merchant cash advance loans are now available to many businesses through payment processes including PayPal, Stripe and Square.

If you process payments regularly through certain services, that might make this form of credit readily available to you—but is it a good choice for your business? Find out more below.

What Is a Merchant Cash Advance?

A merchant cash advance is a type of debt tied to the revenue your business processes via credit cards or through a specific payment processor. Some providers, such as Stripe and PayPal, refer to this debt as working capital loans, but others simply call it a cash advance.

Depending on the provider of the merchant cash advance, this form of debt can have different impacts on your credit and future revenue.

How Does a Merchant Cash Advance Work?

While the details of merchant cash advances vary according to provider and contract, the basic principles are typically the same. You apply to borrow money via your merchant network or payment processor. That entity usually works with a partner bank to provide the loan.

Whether or not you get the loan and how much you’re approved for usually depends on how much revenue you generated within the past year or so. In some cases, the bank may also check your personal or business credit.

Once the loan is approved, you receive the funds quickly. In some cases, it’s less than 24 hours. Within a few days, loan repayments begin via holdback processes.

What Is a Holdback?

Holdbacks are the amount that is withheld from your revenue to pay back the merchant cash advance. When you accept one of these advances, you agree that the payment processor can take a certain percentage of your daily receipts processed through that agency in payment of the loan.

For example, if you borrow $20,000 and agree to a 10 percent holdback, then 10 percent of your revenue processed through that payment processor each day is held back until you pay off the loan. If you have $1,000 in revenue for a specific day, then you would only receive $900 of it.

Merchant Cash Advances: Pros

Merchant cash advances are popular with many businesses because they’re easy and convenient. Check out some of the benefits of this financing source below.

You Don’t Have to Risk Your Assets

This form of debt is tied to your future sales and isn’t secured by any of your assets. If your sales through the relevant channel are less than expected and you don’t meet the minimum payment requirements of the cash advance agreement, you might be billed or turned over to collections.

But, the merchant doesn’t have the ability to force the sale of your assets to recoup the debt in the same way it would if you used those assets for collateral.

You Can Get Money Quickly

Merchant cash advances are one of the fastest ways to access funds via credit. In some cases, once approved, these entities might fund your merchant account within minutes.

Because many banks determine whether you qualify for these advances based primarily on the strength of your revenue, you also usually aren’t required to provide a lot of documentation. The payment processor already has all the information they need about how much revenue you process through them.

You Can Use the Money However You Like

Typically, as long as you’re using the funds for business purposes, you can use the money as you like. You aren’t tied to a specific loan purpose or rules about whether the funds are for working capital or equipment investments.

Merchant Cash Advances: Cons

As with any form of debt, merchant cash advances aren’t perfect for every situation, and they do come with some downsides. Learn about the potential disadvantages below so you can make the most informed decision for your business.

It’s a Short-Term Solution

Merchant cash advances can be a great short-term solution for cash flow issues that are temporary in nature. For example, if you need to invest in more inventory for a holiday season before the higher revenues associated with that season roll in, merchant cash advances can help you do that.

But it’s still only a short-term solution, and if your business doesn’t generate enough income to cover expenses on an ongoing basis, cash advances are at best a metaphorical money Band-Aid that covers up real issues.

Before you rely heavily on these advances in the long term, make sure you fully understand your business’s financial state and are managing accounts and cash appropriately.

Your APR Could Be Very High

The debt obviously isn’t free. Often, merchant cash advances come with flat fees that are baked into the loan. The amount you pay might be determined in part by how much you borrow and what holdback rate you agree to.

For example, if you borrow $5,000 and agree to a 30 percent holdback to pay it off faster, you might pay a smaller fee than if you borrow $5,000 and agree to a 10 percent holdback, which would lead to a longer repayment time.

Fees for cash advances can be thousands of dollars, and when you convert those fees into an APR, you might be surprised that the cash advance isn’t quite as affordable as you thought.

Depending on the terms, how much you want to borrow and how you can pay it back, you might be better off with the APR on a traditional business loan if your credit is good enough to support one.

Merchant Cash Advance Companies Aren’t Federally Regulated

Companies that offer merchant cash advances aren’t typically federally regulated. That means you don’t always have the same protections as a consumer that you would have when dealing with a traditional lender. If you decide that this type of funding is right for your business, make sure you deal with known, reputable organizations to help protect yourself.

Is a Merchant Cash Advance Right for Your Business?

Whether a merchant cash advance is right for your business is a personal decision, but you can ask yourself the following questions to help you make this determination.

  • Can you afford to lose a certain percentage of your income through this revenue stream in the near future? If your profit margins are very low or you’re already barely covering bills, you may struggle once that percentage is being held back.
  • Are you using the cash advance to fund growth or get through a temporary, known issue, or are you using it as a Band-Aid for larger financial problems? If it’s the latter, a merchant advance may at most delay the problems a little bit, but it’s not likely to solve them.
  • Do you understand all the terms of the cash advance, and is this the most affordable way you can get financing for your business? Compare options and ensure that a business loan, a line of credit or another financing method isn’t an option or wouldn’t be less costly in the long run.

Merchant Cash Advances and Your Credit

How merchant cash advances are impacted by your credit—or impact your credit—depend on the way the lender operates. In many cases, you don’t need good credit because approvals are based on your historical revenue numbers.

Some lenders don’t check your credit at all, but others do, and that can lead to a hard inquiry. If you default on the loan, you might also end up with a negative collections item on your credit report. Balancing personal and business credit can be complex.

If you discover that your two worlds are colliding, consider Lexington Law’s credit repair services to help address any inaccurate negative items on your personal credit report.

Reviewed by Daniel Woolston, an Assistant Managing Attorney at Lexington Law Firm. Written by Lexington Law.

Daniel Woolston is the Assistant Managing Attorney in the Arizona office. Mr. Woolston was born in Houston, Texas and raised in Sugar Land, Texas. He received his B.S. in Political Science at Brigham Young University and his Juris Doctorate at Arizona State University. After graduation, Mr. Woolston worked as a misdemeanor and felony prosecutor in Arizona. He has conducted numerous jury trials and hundreds of other court hearings. While at Lexington Law Firm, Mr. Woolston dedicates his time to training paralegals and attorneys in credit repair, problem solving, and ethical and legal compliance. Daniel is licensed to practice law in Arizona, Oklahoma, and Nevada. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

How does a loan default affect my credit?

loan default

Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Source: lexingtonlaw.com

The evolution of the good faith estimate

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A good faith estimate (GFE) is a comparison of mortgage offers provided by lenders or brokers to a consumer. It was recently replaced by the loan estimate—a similar concept with a few small differences. 

What Is a Good Faith Estimate Designed to Do?

The GFE’s purpose was to present mortgage shoppers with all the details they need to know about their mortgage options to help them make well-informed decisions. This transparency ensures consumers are aware of all the costs associated with the mortgage—including fees, APR and other expenses.

Borrowers would receive a GFE three business days after submitting their mortgage application, and after thorough review, would then select which mortgage option they would like to move forward with. 

Are Good Faith Estimates Still Used?

The term “good faith estimate” is not used by lenders anymore, but the concept remains prevalent. In 2015, the GFE was replaced by the loan estimate. Anyone who purchased a home after October 3, 2015, received a loan estimate rather than a GFE. 

In October of 2015, the good faith estimate was replaced by the loan estimate.

If you applied for a reverse mortgage, HELOC, a mortgage through an assistance program or a manufactured loan not secured by real estate, you will not receive a loan estimate. Instead, you will receive a Truth-in-Lending disclosure. 

The purposes of a GFE, a loan estimate and a Truth-in-Lending disclosure are largely the same: providing transparency to borrowers. The main difference—and benefit—of a loan estimate is that there’s more regulation by the Consumer Financial Protection Bureau (CFPB). Since the GFE was not standardized through regulations, they were sometimes difficult to decipher, especially for first-time homebuyers. Conversely, each loan estimate must contain the exact same information in a standardized way, which we’ll cover below. 

What Appears on a Loan Estimate?

According to the CFPB, a complete, compliant loan estimate should include the length of the loan term, the purpose of the loan, the product (fixed versus adjustable interest rate, for example), the loan type (conventional, FHA, VA or other), the loan ID number and indication of an interest rate lock. Additionally, the loan estimate will include the following:

  • Loan terms: A summary of the total loan amount, interest rate, monthly principal and interest and penalties, and whether these amounts can increase after closing.
  • Projected payments: A summary of monthly principal, interest, mortgage insurance, taxes and insurance. Broken down by years 1–7 and 8–30 for a 30-year mortgage.
  • Costs at closing: Estimated closing costs and the total estimated cash needed to close, which includes the down payment and any credits.
  • Loan costs: Origination charges—which is broken down by 0.25% of the loan amount, application fees and underwriting fees—and other fees.
  • Other costs: Taxes, government fees, prepaid homeowners insurance, interest and prepaid property, escrow payment at closing and title policy.
  • Comparisons: Metrics you can use to compare your loan to others. Includes the total principal, interest, mortgage insurance and loan costs you will have paid after five years.
  • Other considerations: Information about appraisal, assumption, homeowner’s insurance, late payment fees, refinancing and servicing.
  • Confirmation of receipt: A line at the end of the statement that confirms you have received the form. This does not legally bind you to accept the loan.

Your loan estimate will also include your personal information, including your full name, income, address and Social Security number. Make sure to double-check all of this information for errors, as they could cause potential problems later in the process.

To better understand your loan estimate, explore the CFPB’s interactive guide.

Closing Disclosure

For first-time homebuyers in particular, it’s important to understand the timeline of events so that you can be prepared for your home buying process and have all the information and necessary documents at hand.

Closing Disclosure Timeline

Lenders are required to send you a loan estimate form no more than three business days after receiving your application. Finally, at least three business days prior to loan consummation—when you are contractually obligated to the loan—you will receive a closing disclosure.

Lenders are required to send you a loan estimate no more than three days after receiving your application and a closing disclosure at least three days prior to loan consummation.

What Is the Purpose of a Closing Disclosure?

The purpose of a closing disclosure is to assign “tolerance levels” to fees listed in the loan estimate form. This means that fees cannot increase over their tolerance level unless a specific triggering event occurs. There are three different tolerance levels:

  • Zero percent tolerance: Fees in this category cannot increase from what is listed on the loan estimate. These fees are typically those paid to a creditor, broker or affiliate, such as origination fees.
  • 10 percent cumulative tolerance: Fees in this category are added together, and the sum of these fees are not to increase by more than 10 percent of the amount listed in the loan estimate. Fees include recording fees and third-party service fees.
  • No tolerance or unlimited tolerance: Fees in this category have no limits at all, and can increase by any amount, as long as they are disclosed “in good faith,” using the best information available. These are usually fees lenders have little to no control over.

Remember not to confuse “zero percent tolerance” with “no tolerance,” as they are quite different. Zero percent tolerance fees cannot increase, while no tolerance fees can increase by any amount as long as it is considered “in good faith.”

Does a Loan Estimate Affect My Credit?

The act of applying for a mortgage may temporarily cause your credit score to dip, as it requires a hard inquiry by lenders. However, you may shop around for different mortgages from different lenders to get multiple preapprovals and loan estimates. As long as you do this all within a 45-day window, these separate credit checks will be recorded on your credit report as one single hard inquiry.

This is because lenders realize that you are only going to buy one home, so they categorize all of the actions you take under one umbrella of applying for a mortgage. Note that you may want to consider the 45-day rule loosely. Prioritize finding the best mortgage deal possible. Even if this means processing a hard inquiry outside of the 45-day window for a better deal, you’ll likely end up saving more money in the long run.

To learn more about what affects your credit and how to work toward improving your credit profile, contact our team at Lexington Law.

Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Home improvement loans

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Improving your home might be a goal for many reasons. It can increase the value of the property for more profit when you’re selling or renting it out. Improvements can also make life more enjoyable for you and your family. But they can be expensive—the average cost of a small kitchen renovation is between about $13,000 and $37,500 according to HomeAdvisor, for example.

Homeowners who want to update their homes often turn to financing as a way to pay for improvements. Find out about home improvement loans and whether they might be an option for you below.

How Do Home Improvement Loans Work?

The specific terms of home improvement loans depend on which type you apply for, but the general concept is that a lender agrees to give you a certain amount of money and you agree to pay it back with interest. In some cases, the lender might require that you use the money for a specific purpose that you stated beforehand. In other cases, the funds are provided as a personal loan for you to use as you see fit.

You can get money for home improvement from a variety of lenders, including banks, personal loan companies, mortgage companies and government agencies. You could also tap your credit lines or credit cards.

How much you can borrow and the rates you’ll pay on the debt depend on a variety of factors. Those include your credit history and whether or not you’re putting up collateral such as home equity.

Types of Loans You Can Use for Home Improvements

Personal Loans

Personal loans are unsecured signature loans. That means you don’t typically put up collateral, and with some exceptions, you can generally do what you want with the loan funds. You make monthly payments as agreed upon, usually for a period of a few years.

Pros: You may be able to get a personal loan that doesn’t require collateral such as home equity. That means you don’t put your homeownership on the line with the loan.

Cons: The lack of collateral makes the loan riskier for the lender, which usually means a higher interest rate and overall loan cost for you.

Credit score requirements: You may be able to find personal loan lenders willing to work with someone with little credit history or only fair credit. However, to get decent rates on a large loan, you may need a good or excellent credit score.

Government Loans

You might be eligible for government loans and assistance programs to modify or repair your home. For example, HUD offers information about home equity conversion mortgages for seniors as well as the Title I Property Improvement Loan Program. Some homeowners may be able to borrow up to $35,000 via the 203(k) Rehabilitation Mortgage Insurance Program, and the VA offers some home refinance options for eligible veterans.

Pros: The credit requirements for government programs and government-backed loans tend to be a bit laxer than when you’re dealing with banks.

Cons: These programs might have very specific eligibility requirements and terms that you have to follow closely. For example, you may be required to use the funds for specific purposes.

Credit score requirements: This varies according to program, but you may be able to access some options with less-than-stellar credit.

Home Equity Loans

A home equity loan (“HEL”) draws on the amount of equity in your home. For example, if your home is worth $100,000 and you only owe $70,000, you may be able to get a loan for close to $30,000 based on the equity.

Pros: Home equity loans are secured by the value in your home, which makes them a less risky investment for lenders than personal loans and credit cards. That helps you get a lower interest rate, making HELs typically less expensive than other home improvement loans.

Cons: The loan is tied to your home ownership. If you default on the loan, the lender can force the sale of your home to recoup its losses.

Credit score requirements: You don’t need a stellar score to refinance your mortgage, so you might not need a great score to take out a home equity loan.

Home Equity Lines of Credit (“HELOC”)

A home equity line of credit is a revolving line of credit based on the equity in your home. The terms work a bit more like a credit card than the terms of a home equity loan do. That means you draw on the credit line as needed to cover repairs and pay it back over time. You can draw again on the funds as you pay them back.

Pros: HELOCs can be a flexible source of income, making it easy to manage costs for renovations without running up excess debt. And because they’re secured by the value in your home, they may come with more favorable terms than credit card debt.

Cons: Again, the debt is tied to your home. If you default on the line of credit, the lender can force the sale of your home to get its money back.

Credit score requirements: Credit score requirements for HELOCs are similar to those for home equity loans.

Other Ways to Pay for Home Improvements

Credit Cards

If you have a credit card with a high enough balance, you can put goods and services on it. The downside is that you might pay high interest on that debt. Alternatively, if you have a strong credit score, you might be able to get approved for a new card with a zero percent introductory APR offer. That might let you pay off your home improvement expenses over a year or two without added interest expense.

Cash-Out Refinancing

If your home has equity, you can also consider a cash-out refinance. If you owe $70,000 and your home is worth $100,000, you may be able to refinance and borrow $95,000. (The other $5,000 If your credit is better than when you bought the home or conditions are more favorable, you might even get better rates.

The $70,000 you owe is paid to the bank holding the original mortgage. You cash out the roughly $25,000 left and can use it as you see fit, including repairing your home.

Tips for Getting a Home Improvement Loan

If you’ve decided to pursue a home improvement loan, use these tips to increase your odds of getting the deal that you want.

Have Specific Terms in Mind

Plan ahead rather than reaching for the loan and then deciding what you’ll do. Define your home improvement plan and budget, and consider whether you can get funding for that much money.

Get a Cosigner If Necessary

Consider whether you might need a cosigner. Depending on what type of loan you want to apply for, a cosigner might help if you don’t have great credit or if your income doesn’t meet the requirements of the lender. Keep in mind that the cosigner will also be taking on all the obligations of the debt.

Know Your Credit Score

Finally, check your credit score and credit reports before you apply. Understanding where you stand helps you choose the financial products you’re more likely to qualify for and avoid unpleasant surprises during the application process. Getting a good look at your credit reports also helps you understand whether there are inaccurate negative items bringing your score down. If that’s the case, consider working with Lexington Law to repair your credit and potentially open more home improvement loan doors in the future.

Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

How to refinance a mortgage with bad credit

Refinancing your mortgage with a bad credit score is completely possible, but is a more complicated process than refinancing with a good score. Because your credit score is such a large aspect of any loan application and refinancing process, it is in your best interest to consider all of your options before moving forward.

Refinancing your mortgage could be a great opportunity to gain some payment flexibility or even take advantage of a lower interest rate. To avoid leaving money on the table, explore all of your options for refinancing with bad credit.

How Credit Scores Affect Refinancing

Lenders use your credit score and overall lending history to calculate the risk of lending you money. A lender will view a borrower with a low credit score caused by loan defaults and constant late payments as a high risk. Because the borrower has shown negative borrowing practices in the past the lender will be more reluctant to sign or refinance a loan.

30-Year Mortgage Rates Based on Credit Scores

760–850 4.6%
700–759 4.8%
680–699 5.0%
660–679 5.2%
640–659 5.6%
620–639 6.1%

Based on 2018 national averages for a $200,000 fixed loan.
Source: FICO

Putting together a mortgage refinancing package for a borrower with a bad financial history might cause the lender to increase the length of the loan term, increase the total interest rate or even increase the total monthly payments. Unfortunately, when a borrower has a pattern of falling behind on payments, a lender will offer more expensive refinancing packages to make up for the added risk.

Is Refinancing Right for You?

It is important to note that refinancing your mortgage may not always save you money. You might come out with the same financial deal or a worse option than you currently have, especially if you have a low credit score. In fact, looking at the average outcomes of Freddie Mac mortgages that were refinanced between 1994 and 2018 shows that only a small fraction of refinances actually resulted in the borrower saving money.

Graphic: Average Mortgage Refinancing Outcome

Source: Freddie Mac

While refinancing may not be right for everyone, it’s still important to consider the benefits of flexibility and length of terms. If you see yourself falling behind on payments or want to pay off your loan faster, refinancing your mortgage might still offer you some benefits.

Refinancing With Your Current Lender

When approaching your current lender about refinancing your mortgage it is first important to assess where you stand as a borrower. If you make payments on time and are in great financial health the lender will most likely want to continue doing business with you. However, if you have been late on payments and are struggling to cover other financial responsibilities the lender might be more reluctant to refinance your mortgage.

1. Shop Around for Low Rates

Before approaching your current lender for refinancing options, it is important to check for other options. To aid with any negotiations you should first check with other banks to see what interests rates are the best. Coming to your current lender after already shopping around for prices will give you more bargaining power to get a lower rate.

2. Show Proof of Savings

If your credit score is low but you have money in the bank a lender may still offer you a competitive rate. Showing proof of income and savings is a good option for new borrowers with short lending historys. For lenders, any proof that a borrower will be able to make payments toward a mortgage or loan will lower the overall lending risk and make a positive impact on the terms of the refinancing agreement.

3. Get a Loan Cosigner

If you have a low credit score and do not have sufficient money in the bank to lower your overall risk, you can use a loan cosigner. A cosigner shows the validity of an agreement and essentially promises to pay any debts that are outstanding if the borrower cannot pay. Depending on your financial situation, it can be difficult to get someone to agree to be your loan cosigner. As such, you should only approach people you’re close with.

4. Show Proof of Income

Even if you do not have a large amount of savings in the bank you can still demonstrate you will make payments on time and carry through with your mortgage agreement by showing proof of income. If you have a well-paying job or have sufficient income coming in, a lender will be more likely to offer a good refinancing option to you. Even without money in the bank or a good credit score, showing proof of income demonstrates that you are financially stable enough to make payments on the loan.

5. Improve Your Credit Score

Before visiting your lender to inquire about mortgage refinancing options you should first look at your credit report for points of action around how you can build your credit score. If your credit report is full of negative items like late payments, hard inquiries and delinquent accounts there could be some places to make up some extra points. Through a series of disputes, letters and phone calls with the major credit agencies you can work toward getting a higher score. There are also companies that offer credit repair solutions that can get your credit removal cases rolling to help improve your score.

Consider Cash-Out Refinancing

Cash-out refinancing is a mortgage refinancing option ideal for people who owe less than their house is worth. It is important to note that a cash-out refinancing option trades your current loan for a cash payment and a larger loan. Lenders can typically refinance a loan for up to 80 percent of the current market value.

Equity is earned on a home when its market value price increases over the price in which you paid for it. Earned equity is normally cashed out with the sale of a home, but it can also be tapped into with cash-out refinancing.

Graphic: 80% have tappable equity on their home

The largest disadvantage to a cash-out refinance is the equity loss of your investment. Although the amount of money between what you currently owe and what your house is valued can be a sizable help for short-term debts, you will still be accountable to pay back the new and larger loan in the long term.

Apply for the Home Affordable Refinance Program

The Home Affordable Refinance Program (HARP) is an initiative created by the Federal Housing Finance Agency following the 2008 economic recession, which caused large mortgage defaults in America. With the sudden drop in housing prices, many Americans were overpaying for their mortgages. HARP has helped refinance over 3 million mortgages so far and represents over 20 percent of all refinances. It is important to note that HARP is not the best solution for everyone, and has five main requirements for eligibility.

  • Your loan is currently owned by the mortgage-backed securities companies Freddie Mac or Fannie Mae.
  • Your mortgage/loan was signed before May 31, 2009.
  • Your current loan-to-value ratio is over 80 percent.
  • You are up to date with your mortgage payments and have not missed a payment in the last six months nor missed more than one payment in the past year.
  • The mortgage was either for your current residence, a second home or a four-unit investment property.

Seek FHA Refinancing

The Federal Housing Administration has a number of refinancing options built to help homeowners with existing FHA secured loans. Unfortunately, the streamlined refinancing is not available for loans that originated outside of any Federal Housing Administration secured lenders. One benefit of refinancing through the FHA is credit or income checks are not part of the process. If your mortgage is secured with the FHA, there are some prerequisites for the refinancing program.

  • You are current on payments and have not missed or been late on a payment for the past year.
  • You have owned the house for over six months.
  • You use an FHA approved lender or an FHA approved bank when refinancing.

If you are still unsure if you qualify the FHA mortgage portal includes a step-by-step guide that can give you an estimate of your best refinancing options available.

Mortgage Refinancing During the Coronavirus Outbreak

Graphic: Coronavirus Impact on Refinancing Your Mortgage

The coronavirus outbreak has impacted our lives on every front. Loss of jobs and income has lead to uncertainty and has made it difficult for many Americans to make their mortgage payments. Many homeowners have been taking advantage of the mortgage relief that was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), legislation that was signed in on March 27, 2020. This allows eligible homeowners with FHA-insured mortgages to have their payments due dates pushed back, also known as forbearance.  

Other homeowners are taking this opportunity to refinance their mortgage. According to the Mortgage Bankers Association, refinancing applications are being filed at a rate that’s 168% higher than during the same period in 2019. Though re-financing sounds like an attractive plan-of-action, it may not be right for everyone — there are additional considerations to make if your credit score is less than ideal.

To better understand your options, see some refinancing factors, considerations, challenges and resources below.

Is Refinancing Worth It?

It is worth looking into refinancing but this may not be the right move for you depending on a variety of factors. In a broader sense, this is a great opportunity to save money if the determining factors are on your side — in that case, yes, it could be worth refinancing your mortgage.

Refinancing Factors To Consider

Before you jump on the phone with your mortgage lender, there are some factors that you should consider that can help you determine if you are a good candidate.

  • Your credit score: As mentioned before, a lower score will typically equate to a higher APR. See the table above for an idea of how your FICO credit score correlates with your APR. Refinancing typically doesn’t negatively affect your credit but there are instances where it could, like refinancing too often.
  • Your recent payment record: If you have a recent history of late or missed payments (not tied to the coronavirus pandemic) that could have a negative impact on your results.
  • Occupancy length: How long you’re planning on living at your house is another huge factor that can affect your savings.
  • How old your mortgage is: The amount of years that you have left on your mortgage is a huge factor. If you are close to paying off your mortgage, it’s likely not worth it.
  • Many of the same rules apply: Regardless of coronavirus, there are certain actions that can improve or hurt your chances when refinancing. To recap, those best practices are: 
    • Shopping around for low rates
    • Showing proof of your savings
    • Getting someone to cosign your loan
    • Showing proof of your income
    • Improving your credit score

Current Mortgage Rates

Mortgage rates are historically low right now, the lowest being 3.13% on March 2, 2020. As of April 16, 2020, the average 30-year fixed mortgage rate was 3.780%, according to Bankrate and 3.341% according to NerdWallet. These rates are changing rapidly so it’s important to keep tabs on their movements if you’re considering refinancing. Check out daily rate updates on Mortgage News Daily to stay up-to-date on mortgage rate information.

Challenges and Risks of Refinancing Your Home

There are always risks that come with refinancing your home. One of the biggest challenges that the current climate has created is the time it may take to get your refinancing request through due to the high demand right now. See that challenge and additional ones below:

  • Longer to acquire: Requests are backed up because lenders don’t have the capacity to process all of the requests that are coming in due to demand coupled with staffing shortages.
  • Closing costs: Most refinancing processes require some sort of fee for processing the request. Depending on your situation, that’s something to consider.
  • Savings loss: Just like refinancing at any other time, there is no guarantee of savings and many people end up in the same spot or with a loss in savings due to increased rates or loss of certain benefits.

Questions To Ask Your Mortgage Lender

Before calling or making an appointment with your lender it’s a great idea to use a mortgage refinancing calculator to get a preliminary idea of how refinancing could work out for you. If you see a positive result and decide to call your lender, make sure you have your proper documents handy and have questions ready to ask them. Some of those could include:

  • What is the estimated turnaround time for this process? 
  • What are the new interest rate and APR?
  • Will I be able to lock in my loan rate?
  • What additional costs would I incur (title policies, inspections, credit reports, etc.)?
  • Will the new agreement include prepayment penalties?

H3: COVID-19 Mortgage Resources

Below is a collection of helpful resources to make sure you understand your options and keep up with the ever-changing rates and information that’s being distributed.

Coronavirus-Specific Resources

Additional Mortgage Information

In the end, there is no ‘one size fits all’ answer to whether or not you should attempt to refinance your home. We recommend reaching out to an advisor who can evaluate your individual situation. If you’re worried about your credit score hurting your chances of refinancing, try a free credit consultation to learn more about your score and how credit repair could help your financial situation. 

Source: lexingtonlaw.com

Does refinancing a mortgage hurt your credit?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Adding anything new to your credit profile can alter your score a bit, though many of these changes are temporary in nature. Refinancing your mortgage can temporarily lower your score, but how much and for how long depends on a variety of factors. Find out more below about whether refinancing your mortgage will hurt your credit and what you can do to protect your score.

What Is Refinancing?

Refinancing means taking out a new loan to pay off your old one. For example, if you owe $200,000 on a $300,000 home and your credit is good enough, you can get a different mortgage to pay off that $200,000. You then start paying the new mortgage.

Why would someone refinance a mortgage? Reasons can include:

  • To get a better interest rate if their credit or the market is more favorable
  • To get different loan terms that better match their financial goals—for example, they might refinance a 15-year mortgage to a 30-year mortgage to reduce the amount they owe each month
  • To benefit from cash-out equity—if you owe $200,000 on a home valued at $300,000, you could get a loan for more than the $200,000 you owe and get the difference back in cash to help cover a large expense

While refinancing can be beneficial, it’s not something to do lightly. It comes with expenses, such as closing costs, and does have an impact on your credit. Avoid being a serial refinancer, which is someone who is constantly turning over their mortgage into a new one.

How a Mortgage Refinance Can Damage Your Credit

The impact of a mortgage refinance (“refi”) on your credit depends on your situation and where you stand financially. Here are two specific ways refinancing your mortgage can hurt your credit.

Credit Checks

Hard inquiries can occur when someone pulls your credit report for the purpose of evaluating you for a loan. These can drop your score by a bit. The more hard inquiries on your credit report, the more your score drops, especially if the inquiries are spaced out over the course of many weeks.

Plus, a lot of inquiries on your report can make you look like a desperate borrower, which doesn’t endear you to future potential lenders.

Hard inquiries usually stay on your credit report for two years. However, they only impact your credit score for the first 12 months.

Closing a Loan Account

When you pay off your existing mortgage with a refinance, that account is closed. Eventually, it will age off of your credit report.

One of the factors that’s used to determine your credit score is the overall age of your credit. That means the total amount of time you’ve personally had any credit history, as well as the average age of your open accounts. If you refinance a mortgage, you could be losing an account with a good amount of age on it, and that can temporarily drop your score a bit.

Handle Your Refinance Like a Pro

If refinancing is the right choice for you financially, you can’t avoid the impact of closing an account and opening a new one. But there are some things you can do to help reduce the impact on your credit score.

Be Smart About the Timing

Limit how many hard inquiries are reported by timing your mortgage applications appropriately. The credit scoring models understand that consumers need to shop around for rates and terms, so they group certain types of inquiries as one event as long as they take place within a certain amount of time.

For example, mortgage applications within the same two-week time frame typically count as one inquiry for any scoring model.

You might also want to try a refinance when you haven’t recently applied for other types of credit, such as a personal loan or credit card. Disparate types of applications are listed as different hard inquiries even if you apply for them all around the same time.

Weigh the Pros and Cons

In many cases, a refinance is a negligible and temporary hit to your credit score, so if you’re going to get a good benefit from the action, you might choose to go forward. Just do your research. Use a mortgage calculator to ensure you’ll save money with a refinance before you commit to a new loan.

Don’t Forget About Refinancing Fees

You may need to pay closing costs or other fees when you refinance, so don’t forget to account for those when you’re weighing the benefits. If a refinance saves you $5,000 over the course of the loan and you’re paying $7,000 in closing costs, it’s likely not a good move.

Continue to Make Payments

Remember that your intent to refinance or even an application for a new mortgage doesn’t mean you’re off the hook for payments on your old mortgage. Don’t stop making timely payments until you’re sure the old loan has been paid off and closed.

Sometimes people don’t make a payment they owe this month because a refi is pending on the current total amount owned. But if you pay late, that can mean your payment is reported late to the credit bureaus, which can be a nasty hit to your credit score.

Don’t worry about overpaying and wasting any money on your old mortgage—if there’s a difference between your payments and the refi amount you overpay, the old mortgage company must refund that difference to you.

Once you’re set up with the new mortgage, ensure you make timely payments on that loan. Payment history is the largest factor in your credit score, so paying your bills on time and consistently is the best way to erase any temporary damage a refinance might have done to your credit score.

Check Your Credit Before and After

Being in the know about your credit score is one of the best ways to protect it, regardless of what financial actions you’re taking. Check your score before you refinance a mortgage to ensure everything’s in order and help you understand what types of mortgage might be right for you.

Check it afterward to keep an eye on things as your credit recovers from any temporary blip that might occur. If you find anything on your credit report that’s wrong or you’re surprised by a lower-than-expected credit score, you might need to do some credit repair work.

Find out more about how Lexington Law can help you address inaccurate negative items on your credit report and work toward a generally more positive credit future.

Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

How to avoid or remove PMI

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Private mortgage insurance (PMI) has been around for more than 60 years, helping make mortgages more affordable for buyers who can’t afford a 20 percent down payment. Loans with PMI certificates have often accounted for a decent percentage of mortgages issued each year. In fact, in 2019, that number was just below 40 percent.

But PMI does add an expense to your home loan, and you likely want to sidestep it if possible. Find out below if you can avoid PMI, or learn how to remove PMI if you’re already paying it.

What is PMI?

PMI is insurance, but don’t get it confused with homeowner’s insurance—that’s a different product you might need to pay for. PMI is insurance for the lender. It’s meant to be a fail-safe to help a lender recover losses if you default on the loan.

Lenders require that you purchase PMI in cases where you aren’t putting at least 20 percent down on your home. Most commonly, you pay PMI as part of your monthly mortgage payment. In rarer cases, you might pay all of the PMI as a lump sum when you close on the home or pay a partial lump sum and pay the rest in your monthly mortgage payments.

Regardless of how you pay, PMI can be an expensive addition to your mortgage. It’s important to note, however, that PMI works differently with FHA loans and certain other government-backed loans. For example, FHA loans have MIP, which is a mortgage insurance premium, instead of PMI.

What factors affect the cost of my PMI?

According to Freddie Mac, PMI can cost on average between $30 and $70 extra per month for every $100,000 you borrow. So, if you’re borrowing $200,000 for 30 years and you pay PMI for half of that term, you could pay between $60 and $140 per month for 15 years—or 180 months. That’s between $10,800 and $25,200 added to your mortgage.

The exact amount you pay for PMI depends on a variety of factors, including:

  • Size of down payment (the more you pay up front, the less risk there is to the lender because the home has some equity—or profitability—built in)
  • Credit score (the higher your score, the less risky of a borrower you appear to lenders)
  • Loan appreciation potential
  • Borrower occupancy
  • Loan type

How can I avoid PMI?

In today’s mortgage market, it can be difficult to steer clear of PMI altogether. But here are some things you can do, depending on your situation, to avoid this expense.

Make a 20 percent down payment

If you can make a 20 percent down payment, you typically avoid PMI. That’s because PMI kicks in when you owe more than 78 to 80 percent of the value of the home. Assuming the home you’re purchasing is priced at or below its appraisal value, paying 20 percent up front automatically gets you enough equity to not need to pay for PMI.

Get a VA loan

VA loans don’t require a down payment at all, and no matter what, they don’t come with PMI. These loans are reserved for qualifying veterans and their eligible beneficiaries.

Get a piggyback loan

A piggyback loan is a second mortgage or home equity line of credit that you take out at the same time you take out your first mortgage. You use the piggyback loan to fund all or part of your down payment so you can meet the 20 percent requirement. If you consider this option, make sure to do the math to determine which saves you the most money: paying PMI or paying the interest on the second mortgage.

Request lender-paid mortgage insurance

In some cases, the lender might be willing to take on the burden of the PMI cost. They would do so through lender-paid mortgage insurance, or LPMI. Typically, the lender charges a higher rate of interest in exchange for this favor. Again, it’s important to do the math to find out which one is in your best interest.

How can I remove PMI once I have it?

As a homeowner, you have some options for removing PMI once you have it. You can take some of the actions summarized below, but the Consumer Financial Protection Bureau notes that you must also meet four criteria to protect your right. Those are:

  • Asking for the PMI cancellation in writing
  • Being up to date on payments and having a generally solid payment history
  • Certifying, if required, that there are no other liens on your mortgage
  • Providing evidence, if required, that the property value has not fallen below the original value of the home when you purchased it

If you can fulfill these criteria, here are some ways you can cancel your PMI.

Get enough equity in your home

The PMI Cancellation Act, or Homeowners Protection Act, mandates PMI cancellation when your principal mortgage balance reaches 78 percent of the value of the property (or you can also think of it as you reaching 22 percent equity). At that point, lenders must remove PMI. If you want, you can ask for PMI cancellation as soon as you reach 20 percent equity, but lenders aren’t required to remove PMI at that point.

Lenders are also required to tell you when you will reach the point of PMI cancellation if you continue to pay on your loan as agreed. You can calculate where you are in the process at any time by taking your current loan balance and dividing it by the amount the property originally appraised for. For example, if you owe $170,000 and the property appraised for $200,000, you are at 85 percent.

Get halfway through your mortgage term

Values can rise and fall, but you’re not stuck with PMI forever. Lenders must remove PMI when you’re halfway through your mortgage regardless of values. So, if you have a 30-year loan, your PMI should be canceled at the 15-year mark.

Refinance your mortgage

Another way to remove PMI is to remove your mortgage altogether. If you can arrange it so you meet the 78 percent value requirement on a new mortgage, you avoid PMI.

Get a reappraisal

Perhaps your home has gone up in value substantially and you owe much less than 80 percent of the current value. If you can demonstrate this, the lender may remove PMI because there’s less risk involved with the loan.

Remodel your home

If your home hasn’t gone up in value on its own, you might be able to add value with a remodel. Certain types of remodels, such as kitchen upgrades, could add enough value to impact the loan-to-value ratio so you don’t need PMI anymore.

Getting rid of PMI can be a great way to save money on your mortgage, but always remember to follow good personal financial management. Look at all your options and run the numbers to ensure you’re not spending more than you would save. If you’re already considering a home remodel, tossing PMI to the curb is a great perk. But you might not want to put in $30,000 worth of remodel costs just to save $10,000 in PMI, for example.

Finally, while you’re dotting the i’s and crossing the t’s on your mortgage expenses, make sure you don’t lose track of other financial matters. Keep an eye on your credit report, and if you find something that looks wrong, consider working with Lexington Law on credit repair.

Reviewed by Vince R. Mayr, Supervising Attorney of Bankruptcies at Lexington Law Firm. Written by Lexington Law.

Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Debt consolidation loans: what you need to know

Debt Consolidation Loans Title Image

Keeping track of your finances can be difficult, especially when you have several payments going in several different directions. If that sounds familiar, a debt consolidation loan could help. 

Our guide will break down what you need to know about debt consolidation loans and help you decide whether or not they’re the best option for you.

What are Debt Consolidation Loans?

Debt consolidation loans are used to combine multiple debts, such as credit cards, high-interest loans and medical bills, into an account with one monthly payment and lender. Debt consolidation loans are a type of personal loan. 

Applying for and receiving a debt consolidation loan is a multi-step process that requires you to choose your loan terms, finalize your application and repay the loan.

Here are the steps you should take when applying for a debt consolidation loan:

  1. Meet preapproval terms. Preapproval terms will differ between lenders, but typically they request that you have at least a 580 credit score and no bankruptcies. A lender will perform a soft inquiry on your credit to see if you meet their requirements before quoting you a rate. 
  2. Decide which credit card debts to pay off. Before choosing your loan terms, prioritize which of your credit cards you want to pay off first. This will dictate how much you borrow and the length of the loan. 
  3. Finalize your application. Finalizing your application requires a hard inquiry on your credit report.  
  4. Go through a closing process. If you’re approved, loans are disbursed either directly to your creditors or sent to you by check.
  5. Start paying off your debt.      

There are two types of debt consolidation loans: secured and unsecured. Secured debt consolidation loans use collateral, such as home equity. While secured loans typically have better interest rates, they can be risky. You could face foreclosure if you can’t pay your debt. 

Unsecured loans are more common and don’t require any collateral, but they typically have higher interest rates and are more expensive to pay down. 

How Do I Qualify for a Consolidation Loan?

To qualify for a debt consolidation loan, you must meet lender requirements. 

Lenders often use your credit score to determine your interest rate. Having a high credit score, a lower debt-to-income ratio and a stable income will increase your chances of securing a loan.

Traits to Increase Your Chances of Securing a Debt Consolidation Loan Image

Can I get a Debt Consolidation Loan with Poor Credit?

Lenders view people with low credit scores as high risk, so it might be difficult to get approved for a debt consolidation loan if you have poor credit. Those with poor credit who are approved will end up paying higher interest rates. 

If you have a low credit score, be cautious about taking out a debt consolidation loan. The interest rate on a debt consolidation loan could be higher than your existing debt, making it more expensive to pay down. 

How to Choose the Right Loan

When choosing a debt consolidation company, compare loan terms and interest rates to see how much interest and how many fees you’ll pay overall. This can help you pick the loan option that saves you the most money.

Here’s what you should consider when evaluating a debt consolidation loan: 

  • Interest rates: Most lenders offer a fixed-rate loan, while some offer both fixed- and variable-rate loans. 
  • Loan terms and restrictions: Review the loan period length and loan amounts to see whether the amount and repayment timeline meet your needs.  
  • Fees and penalties: Look at the origination, prepayment and late fees, which can significantly increase the cost of your loan. Some lenders place restrictions on how you use the loan, such as prohibiting consolidations on student loan debt.
Factors to Consider When Picking a Debt Consolidation Loan Image

Is it a Good Idea to Get a Debt Consolidation Loan?

There are benefits to using a debt consolidation loan, but there are also potential disadvantages. Ultimately, it depends on your personal situation. 

If you qualify for a new loan with favorable terms and a lower interest rate than your current debt, it could be a good idea. However, you need to consider your credit scores, income and ability to repay the loan.


  • Debt consolidation loans can have lower interest rates than credit cards and other types of debt, depending on your credit range. If you qualify for a low-interest loan, you can reduce your current interest rate and save money on repayment.
  • You can lock in a low rate with a fixed-rate debt consolidation loan instead of owing money at variable rates.
  • A debt consolidation loan gives you a debt repayment timeline specified in your loan agreement, so you’ll know exactly when you’ll pay off the loan. 
  • You’ll have payments that are easier to handle if the loan lowers your monthly payments. This means that you’re less likely to be subject to additional fees and higher interest rates that come with missing a payment.


  • People with low credit scores may only be given loans with a higher APR than their existing debt. 
  • You could wind up paying a lot more interest overall, depending on your loan’s interest rate. Although your monthly payment might be lower, your repayment term could be longer. 
  • A low-interest rate for a debt consolidation loan could just be a “teaser rate” that only lasts for a certain time. After that, your lender may increase the rate you have to pay.
  • The loan may also include fees such as application fees, origination fees or prepayment penalties that you would not have to pay if you continued to pay back your current lenders.
  • You put your house, car, retirement fund or other assets at risk when you use collateral to secure your loan. If you’re not able to pay your loan, you could face losing those assets.
  • You could end up in more debt if you get a consolidation loan and keep making more purchases with credit.

What are Alternatives to Debt Consolidation?

If debt consolidation isn’t your best option, there are other ways to manage your debt. 

  • Credit cards with an introductory 0 percent APR balance transfer allow you to consolidate your debt on one credit card. Be aware: if you are more than 60 days late on a payment, you face a penalty APR on all balances, including the transferred balance. There’s also usually a balance transfer fee, either as a fixed amount or a percentage of the amount you transfer.
  • Creating a budget can help you understand how much you can afford to pay each month toward existing debt. 
  • Responsible credit card usage can ensure you aren’t allowing your balances to get too high. If you’re spending more than you’re earning, consider adjusting the way you spend to pay off your existing debt.
  • Bankruptcy may be an option if you are overwhelmed with debt and see no way to pay it off. However, a bankruptcy can remain on your credit report for up to ten years.
Other Options for Managing Debt Image

Do Consolidation Loans Hurt Your Credit Score?

A debt consolidation loan could actually help your credit score. If you have a high credit balance, consolidating could lower your utilization rate. Additionally, a lower payment each month could mean more on-time payments.

That being said, how your debt consolidation loan affects your credit score really depends on your ability to make your payments. Having monthly payments due on a loan, in addition to credit cards, could put you in an even more difficult situation.  

Managing Multiple Payments, Debt Consolidation Loans, and Your Credit Report

Many consumers turn to a debt consolidation loan because of the challenges they face keeping track of multiple accounts. 

Mistakes can happen, but if payments are applied to the wrong account or your accounts are reported more than once, it could make you appear risky to lenders. Mistakes on your credit report can be costly and unfairly affect your credit score if they go unfixed. 

Credit repair can be a hassle, especially if you are unfamiliar with the process. At Lexington Law, we do the heavy lifting to make the dispute process easier, by identifying and challenging questionable negative items on your behalf. Although we don’t manage debt consolidation loans directly, our team of credit report consultants can help you navigate the credit repair process. 

Source: lexingtonlaw.com

Types of mortgage loans

You’ve worked hard and now you’re ready to buy a new home. Find out about the types of mortgage loans to understand your options and make an educated decision.

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

As of mid-2019, around 37% of homeowners in the U.S. owned their property free and clear, which means any mortgage they had was paid off. That leaves 63% of homeowners still making that payment every month. What you might not realize is that there are many types of mortgage loans, and those millions of homeowners have different rates and terms. Understanding all your options is one of the first steps in choosing the type of mortgage that’s right for you and your situation.

What Is a Mortgage?

A mortgage is a loan that you get to buy property, such as land or a home. Like any other loan, mortgages have components such as principle and interest. But since they’re for such large amounts, they can be more complex than other loans. Some common components involved in mortgages include:

  • Principal. This is the part of the loan that is what you borrowed—or what’s left of that amount as you pay it down.
  • Interest. Interest is what you pay to be able to borrow the principal amount. It’s usually charged as a percentage of what you owe.
  • Terms. This typically refers to the structure of your loan, such as how many years it’s for.
  • Insurance. You may need to pay homeowners’ insurance as part of your mortgage payment. This is property insurance that helps cover losses if your home is damaged or lost in a fire or other covered disaster. Depending on how much you put down on your mortgage or what type of mortgage loan you have, you may also have to pay private mortgage insurance. PMI is coverage for the lender—if you fail to pay the mortgage, it helps them recoup some of their losses.
  • Taxes. Depending on where you live, you might need to pay property taxes on your home. This can be rolled into the mortgage and your monthly payments.

The Main Types of Mortgages

Many types of mortgages exist. Find out about some of the most common below.

Government-Backed Mortgages

What is it? Government-backed mortgages are at least partially ensured by the federal government. The loans don’t come from the federal government, however. They still come from commercial lenders.

Pros: Because the loan is government-backed, it’s seen as less risky than a conventional mortgage for the lender. That means that you might be able to get approved for one of these loans with a lower credit score or smaller down payment.

Cons: Some government-backed loans mandate PMI, which can make them potentially more expensive in situations where someone has good credit and a large down payment.

Types of Government-Backed Mortgages

  • FHA Loans. Loans insured by the Federal Housing Administration can be approved with a credit score as low as 500 under certain conditions. If you have a higher credit score, you might be able to qualify for an FHA loan with only 3.5 percent down.
  • USDA Loans. These loan options typically involve the purchase of homes in qualified rural areas. Borrowers must meet certain income and credit requirements.
  • VA Loans. The VA provides a number of programs to assist veterans and their families with housing, including one type of loan directly from the VA. The VA also backs three types of loans, and these loans often require no down payment.
Government-backed mortgages

Conventional Mortgages

What is it? These are traditional commercial mortgages that aren’t backed by another entity such as the government.

Pros: If your credit is good enough and you have a large down payment, you might be able to score a low interest rate. You’ll also potentially save money because, with a 20 percent down payment, you won’t have to pay PMI.

Cons: Conventional mortgages typically require a credit score of 640 or more. You might also have to wait a longer period of time after a major negative item on your credit report—such as a bankruptcy—than you would have to wait when applying for government-backed loans.

Conforming Mortgages

What is it? Conforming mortgages are conventional mortgages that comply with standards set by Freddie Mac and Fannie Mae. These are two government-controlled agencies that buy commercial mortgages after they’ve been issued. The agencies pay the banks for the mortgages. The lenders then have more capital so they can fund new mortgages—it’s an effort that was started decades ago to help make homeownership more accessible.

Pros: The loans have to conform to standards, which means lenders must do some due diligence to ensure the borrower is not high risk. While that does mean you must have a decent credit score and debt-to-income ratio, it also means the loan will likely have a decent interest rate.

Cons: Conforming loans are limited to certain amounts. In 2020, the limit is $510,400 for single-family homes. The limits do vary slightly by location, with higher limits in especially expensive areas.

Jumbo Mortgages

What is it? Jumbo mortgages are those that surpass the limits set by Freddie Mac and Fannie Mae for conforming loans. In 2020, then, that would mean mortgages for more than $510,400 in most areas.

Pros: Jumbo mortgages allow you to get funding for expensive or luxury properties.

Cons: Because of the size of the loan and the fact that it’s not eligible for purchase by Freddie Mac or Fannie Mae, the underwriting process can be extensive. You may have to demonstrate excellent credit as well as produce a variety of financial documents.

Interest-Only Mortgages

What is it? This is a type of adjustable-rate mortgage (you’ll learn more about this in a moment) where you only pay toward the interest for the first few years of the loan. After the introductory period is over, you pay both interest and principle, which means your monthly payments likely go up. Your interest rate is also adjusted each year based on various economic factors.

Pros: Paying interest only can significantly lower your mortgage payment at the front end of your loan.

Cons: Your payment will go up and you won’t have a fixed interest rate. Depending on what the markets do, that could increase your costs unexpectedly.

Mortgage Interest Rates

Mortgage interest rates are typically fixed or adjustable. Which one you choose depends on your financial situation and the type of loan you can qualify for.

Fixed-Rate Mortgages

With this type of loan, your interest rate is set in the contract and doesn’t change over the years. The advantage of this is that you know exactly what you’re going to pay and what rate you have. The downside is that if you buy a home during a time when interest rates in the market are high, you might get stuck with a higher rate.

You can seek a lower rate by refinancing your mortgage, though you’ll have to pay closing costs and other fees, and your credit and income might be reviewed again. Many people do refinance to get a lower rate to save money if they have a better credit and financial situation than they did when they bought their home.

Adjustable-Rate Mortgages

In an adjustable-rate mortgage, or ARM, your rate is variable. That means it fluctuates periodically. How often the interest rate might change depends on your mortgage contract. The downside of an ARM is that you can be surprised with large interest rate hikes. The upside is that if you buy a home when interest rates are high, you might see a lower rate if the markets swing that direction in the future.

Mortgage Terms

Terms refer to how long you take out a mortgage loan for. Many options exist, but the two most common are summarized below.

15-Year Mortgages

This means that you borrow the money for 15 years. The benefits of a short-term mortgage like this are that you pay your home off and own it outright much faster, and you do so with significant interest savings. The downside is that by squeezing the mortgage into only 15 years, you will have much higher monthly payments.

30-Year Mortgages

This is what most people consider the traditional mortgage term. The benefit is that you spread your loan out over a longer period, so you pay less each month. The downside is that by stretching out your payments, you pay more in interest over the life of the loan.

Mortgage terms

How to Get the Best Loan Terms

To save money on your home purchase, you want the most favorable terms possible. That means you want the best length of time for your needs and a good interest rate. Try these tips to achieve your goal:

  • Ensure your credit score is good or excellent. If your credit score is lackluster, you might want to consider taking time to improve it before buying a home.
  • Have a decent down payment. Putting 20 percent down on a home keeps you from having to pay PMI, for example. But even putting 10 percent down might help you get better rates than if you put only three percent down.
  • Compare lenders and rates to find the best deal. Shopping around for a mortgage within a short period of time doesn’t hit your credit hard because generally, the credit bureaus consider multiple mortgage applications within a few weeks of each other to be a single inquiry.

Mortgages can be complicated, and there are a lot of professionals who can help you figure out which one is best for you. When it comes to working on your credit score, the team at Lexington Law might be able to help you out by investigating and disputing inaccurate negative items on your credit report. Get in touch with us today to find out more.

Reviewed by Alexis Peacock, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Alexis Peacock was born in Santa Cruz, California and raised in Scottsdale, Arizona. In 2013, she earned her Bachelor of Science in Criminal Justice and Criminology, graduating cum laude from Arizona State University. Ms. Peacock received her Juris Doctor from Arizona Summit Law School and graduated in 2016. Prior to joining Lexington Law Firm, Ms. Peacock worked in Criminal Defense as both a paralegal and practicing attorney. Ms. Peacock represented clients in criminal matters varying from minor traffic infractions to serious felony cases. Alexis is licensed to practice law in Arizona. She is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com