Question on Applying for Home Equity Loan vs LOC

[Anonymous]

My wife and I currently own a home, financed through Bank of America (previously Countrywide). Estimated home worth $205K - we owe $113K and currently have a 5.75% interest rate.  Question- my wife lost her job, our credit has TANKED in the process due to high utilization on my credit cards.  Her credit has always been poor due to her past credit woes.  My question is, she just began working again- our combined income is about $7K monthly, mine alone is $5K - I owe about $24000 in credit cards with high interest rates - and was thinking about doing a home equity loan of some kind to consolidate this debt, the cards are in my name.  With a score of 630, can I apply solely for the home equity line or do I have to include my wife and her poor credit as well as a co-applicant?  She is co-owner, so I wasn't sure how this worked however she just recently went back to work so her income has not been part of our combined income for over 2 years now.

Would I be better off doing a Home Equity Loan, or a LOC?  I don't think I would qualify at this point for a personal loan of any kind, regardless of my income- or our combined income due to our credit scores.  Any suggestions?  The interest on these cards is killing me and I'd love to consolidate as soon as possible.

[Lel]

First things first, many people will tell you that it is a bad, bad idea to convert your unsecured debt (credit card debt) into secured debt (a HELOC or home equity loan) that uses your home as collateral.  If you were to have another job loss in the future and are unable to make the payments on your 2nd mortgage, the lender can foreclose.  There is a lot at stake.  Since you have ample equity in your home, the second lienholder probably would not hesitate to foreclose because it could recover every penny that it is owed.

But to answer your question, your wife does not have to be a co-applicant for the HELOC or home equity loan, but she would have to sign the deed of trust (I believe - don't quote me on this) indicating that she gives you permission to take out the loan.  However, not including her on the application also means not including her income, so if your monthly credit card payments really drive up your debt-to-income ratio, then you might not be able to qualify on your income alone, depending on what other debts you have.  With a first mortgage balance of $113,000 and a 5.75% interest rate, I don't expect your current home-related expenses to be too overwhelming.

With regard to whether to choose a HELOC vs a fixed-rate home equity loan, you're going to get a better interest rate with a HELOC, but it will be a variable rate.  The rate on a HELOC is usually quoted as the Prime Rate plus or minus a margin, such as 1.24% or 2.49%.  Almost all HELOCs being issued right now are priced at prime or higher, since the prime rate is as low as it can get.  The prime rate is expected to start rising again by spring 2010.  The margin you get on a HELOC depends on several variables, including credit score.  I don't know if a 630 would qualify you; if it does, you probably won't get the most favorable HELOC rates out there.

Fixed rate home equity loans typically have higher rates than HELOCs, sometimes by 5 or 6 percentage points.  You'd still do better than your current credit card interest rates, and would enjoy the security of knowing your interest rate and payments will never change.  But it will probably be a long time before the HELOC interest rate rises to match the current home equity loan rates.

HELOCs also have the advantage of having zero or minimal closing costs.

Having said all that, think really hard about using your home equity to pay off your credit card debt.

[Anonymous]

Thank you so much for responding so quickly.  At this point, I'm desparate to get out from under the interest on these cards - my job is secure, that I'm certain.  With a credit score (Fico) of around 630- am I even eligible to apply for a home equity line or loan?  Are there other options that might be better?

[Anonymous]

what are all your debt payments per month?

With a 630 FICO I am not sure what options are available as things are alot tighter than they used to be.  Even if the underwriter can ignore the current card payments (since I assume they would be paid off at close through escrow), low FICO and that much debt is going to scare them alot.  The truth is (and not to say that this is true in your case), 50-60% of the people who heloc or equity loan to get out of cc debt ed up back in as much debt in a year or two and the UW knows this.

Anyways, your best bet is to just call arounf to some local banks/brokers.  You have decent equity, so that is a big seller.  Also, don't ask for more cash out than you need for the cards might help.  That will still keep your LTV as low as possible, elminate your debt, and not scare them with cash out to buyer.   

Anyways, good luck with it all.