Getting a Home Equity Credit Line after a Bankruptcy

Mortgage rates have recently dropped, making mortgage refinancing and home equity loans attractive options again. If your first mortgage rates are good but your credit isn't, a bad credit home equity loan (second mortgage) will probably be your best bet. This way, you can continue to enjoy great rates on your 1st while rebuilding your credit with the 2nd mortgage.

If you haven't yet filed for bankruptcy, consider this: the new bankruptcy laws make filing for bankruptcy more difficult and much more expensive. You no longer can choose whether you file Chapter 7 or Chapter 13, and, among other new requirements, you must undergo consumer credit counseling--yet another expense. However, a second mortgage can help you keep your house by paying your past debt due debts, as well as paying off collections and judgments.

If you have filed for bankruptcy recently, you could probably still get a home equity loan. Most lenders prefer that you wait at least two years after your bankruptcy has been discharged before shopping for a loan, but some may grant you credit as early as six months after your debts are discharged. When shopping for a home equity loan, it's important to know what type of 2nd mortgage you want.

A home equity installment loan (HEIL) is best for a one-time expense like debt consolidation. However, a credit line great for financing construction or home improvements. And, a home credit line, more properly known as a home equity line of credit (HELOC), works like a credit card, so you can borrow more than once without having to apply for a new loan. Generally, you are given special checks that you can use to write checks for each contractor against the loan amount. You only pay interest on the amount of equity you use, and under current Federal law, the interest on a second mortgage is tax-deductible up to $100,000.

The Federal Trade Commission (FTC) advises you to compare the annual percentage rate (APR)--the cost of credit on a yearly basis. Be aware that the advertised APR for home equity credit lines is based on interest alone. For a true comparison, compare other charges, such as points and closing costs, which will add to the cost of your loan. Check the periodic cap--the limit on interest rate changes at one time. And, check the lifetime cap--the limit on interest rate changes throughout the loan term. Ask the lender which index is used and how much and how often it can change. An index (such as the prime rate) is used by lenders to determine how much to raise or lower interest rates.