Are you looking to purchase a new home? Maybe you are wondering if refinancing your current mortgage is a good idea? If so, you will want to do your homework to make sure you are getting the best rate you can for your situation. There are various factors that play into the lenders decision on whether they will make you a loan and what rate they are willing to give you.

Your Credit Score
If you don’t know what your credit score is, you will want to find out. There are online services where you can find out what your credit score is. The better your credit score, the better chance you have of getting a good home loan rate. If your credit score is not where it needs to be to get the loan or to get a good rate, you may want to do some credit repair prior to getting your loan. There are many credit repair companies that can guide you as to what how you can best clean up your credit and raise your credit score.

Income
The lender is going to want to verify that your income is sufficient to make the monthly payment. They will look at your sources of income as well as how long you have been getting the income to decide if they can rely on that income for the loan payment. If you are self employed, they will be looking for a longer track record than if you are employed and receive a paycheck. The information the lender will want to see includes: tax returns, pay stubs, bank statements

Debts and Obligations
The lender will look at what your current debts and obligations are. They want to verify that with the income you have coming in, you can comfortably afford their payment on top of the other debts. You will want to clean up any small debts or collection accounts prior to applying for your loan. This will help your debt ratio as well as your credit.

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When property owners apply for a home equity loan or credit line, the available equity is used as collateral. Home equity can be calculated by subtracting the balance owed against the home loan from the appraised property value. Unfortunately, the banking and real estate crisis depleted accrued equity for many homeowners due to significantly reduced property values.

Before tying up home equity in second mortgages or lines of credit, borrowers must determine if this is the best financial option. Most borrowers have every intention of paying off home loans, but even the best laid plans can fail. By using real estate as collateral, homeowners could be placing their property at risk for foreclosure.

Homeowners require home equity loans for many reasons. The most common include making home improvements and paying off credit cards and unsecured loans. Home loans can be a good choice for borrowers carrying more than $10,000 in outstanding debts.

The interest rate assessed against home loans can be substantially less than interest assessed against unsecured loans. Transferring debts to a low interest loan can save borrowers hundreds of dollars in interest charges.

Some people take out home equity loans to consolidate college loans. Several options exist for consolidating student loans without using real estate as collateral. Post graduates with federal student loans should research education loan consolidation alternatives by visiting the Department of Education website at ed.gov.

Graduates carrying multiple private college loans can obtain loan consolidation resources through SallieMae.com. Additionally, banks and credit unions offer options for consolidating private and federal college loans.

Homeowners needing to make home improvements or consolidate unsecured debts may find a home equity line of credit to be a better option. HELOC loans offer borrowers a line of credit which can be used as needed. Mortgage lenders base the amount of available credit on the amount of accrued equity, along with the borrower’s credit history and FICO score.

Borrowers are only required to pay interest against funds they borrow from their line of credit. For example, a homeowner obtains a HELOC loan with a $30,000 line of credit and borrows $10,000 for home improvements. The bank assesses interest against the $10,000, not the full amount of available credit. Each time homeowners make a payment, their available line of credit increases.

Borrowers can elect to repay borrowed funds in a lump sum payment or through a monthly installment plan. A unique feature of HELOC loans is during the first ten years borrowers can choose to pay only the interest assessed on borrowed funds. Afterwards, they enter into the ‘draw’ period and must pay the outstanding balance in full.

Depending on the circumstances, obtaining a second mortgage may be a better choice than obtaining a home equity loan or line of credit. With second mortgages, homeowners borrow a fixed amount of money which is paid via monthly installments over a period of time.

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