| Mortgage Tips: Pros And Cons Of Refinance Loans For People With ...
If you're stuck under some high credit card bills and your credit rating is slipping, one of the best ways to immediately improve your credit is a home equity loan. When the loan closes, home owners have cash-on-hand to pay off bills. The result: their credit rating starts to improve immediately. Banking executive Dan Ambrose refers to those as the “band-aid loan", also known as the 2/28 in mortgage lingo. “Most sub-time loans are short term loans, not A paper market, which means a fixed rate for two years then the loan adjusts." He's talking about 30 year refinancing mortgages for people with less than stellar credit. Lenders offer a home-equity loan at a set interest rate for two years, and then the loan converts to a variable rate loan, where the interest rate fluctuates with the prime rate at the time.
Will people stop spending if their homes are worth less?
Subprime lenders, who market to homebuyers with low credit ratings, have been in distress nationwide and in Texas. Some have gone out of business or scaled back operations. "We're going to see about a 10 percent correction in our business over the next two months," said Kevin Miller, chief executive of TexasLending.com, a mortgage banker in Dallas that does about 25 percent of its business in subprime loans. Subprime loans account for about 13 percent of residential mortgages in Texas, and nearly 16 percent of those are past due. The percentage of such loans in foreclosure in Texas rose to 4.3 percent at the end of December, compared with 4.1 percent at the end of September. The situation in Texas is apt to get worse before it gets better, analysts said.
Subprime loans play hard to get
In the midst of tightening lending standards, borrowers with low credit scores probably will struggle to get a good deal, but people with higher scores might actually find it easier to qualify.
"We are seeing a huge shift going on right now," said Evan Jones of GMAC Mortgage in Salt Lake City.
And it all boils down to credit scores.
Generally, borrowers who have credit scores 620 and below are considered subprime. Those with scores from 620 to 720 are in a midgrade category and are considered more favorable risks. The best rates and terms go to so-called prime borrowers with credit scores above 720 out of a possible 850. And they might be able to negotiate better rates than ever before.
Just two weeks ago, Jones said, he could have provided a home equity loan to a borrower with a credit score of at least 580.
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