Understanding Home Equity Loans and Managing Credit Card Debt

At O1ne Mortgage, we understand that navigating the world of home equity loans can be complex, especially if you’re dealing with high credit card debt. Our goal is to help you make informed decisions and secure the best possible terms for your loan. If you have any questions or need assistance, don’t hesitate to call us at 213-732-3074. We’re here to help!

How Does a Home Equity Loan Work?

A home equity loan allows you to borrow a portion of the equity you have in your home. Typically, you can borrow between 75% to 85% of your home’s equity. Equity is the difference between your home’s market value and the amount you still owe on your mortgage. For example, if your home is worth $420,000 and you owe $230,000 on your mortgage, your equity is $190,000. This means you could potentially borrow between $140,000 and $160,000.

Home equity loans are considered second mortgages, meaning your home is used as collateral. If you fail to repay the loan, the lender can foreclose on your home. When you apply for a home equity loan, the lender will evaluate both your home and your financial situation. This includes a home appraisal to determine your equity and an assessment of your creditworthiness, which is where your credit card debt comes into play.

Is Credit Card Debt a Factor With Home Equity Loans?

Yes, high credit card debt can impact your ability to qualify for a home equity loan and affect the interest rates and fees you receive. Here’s how:

Increased Debt-to-Income Ratio

High credit card balances mean higher minimum payments, which increase your debt-to-income (DTI) ratio. Lenders typically prefer a DTI ratio of 43% or less. You can calculate your DTI by dividing your monthly debt payments by your gross monthly income and multiplying by 100 to get a percentage.

For example, if your monthly gross income is $7,200 and your monthly debts total $3,150, your DTI ratio is 44%. Reducing your credit card debt can lower your DTI ratio, improving your chances of qualifying for a home equity loan.

Reduced Credit Scores

High credit card debt can also lower your credit scores. Lenders often require a FICO® Score of at least 680, with some preferring scores of 720 or higher. High credit utilization rates (the balance on your credit cards as a percentage of your credit limits) can negatively impact your credit scores. Lower credit scores can result in higher interest rates on your loan.

How to Reduce Credit Card Debt Before Applying for a Loan

If you’re looking to improve your chances of getting a home equity loan with favorable terms, consider these strategies for reducing your credit card debt:

Borrow from Friends or Family

A short-term loan from family or friends can help you pay down high credit card debts. Be sure to set up clear repayment terms to protect your relationship.

Redirect Discretionary Spending

Cutting back on non-essential expenses can free up money to pay down your credit card debt. Consider reducing utility bills, insurance premiums, and eliminating extras like streaming subscriptions or daily lattes.

Increase Your Income

Taking on a part-time job or side hustle can generate extra income to pay down your credit card debt, improving your DTI ratio.

Seek a Debt Consolidation Loan

Using a personal loan for debt consolidation can help you pay off high-interest credit card debt. However, keep in mind that the payments on your personal loan will also factor into your DTI ratio.

The Bottom Line

High credit card debt can affect your ability to qualify for a home equity loan and result in higher interest rates. Checking your FICO® Score and reviewing your credit report can help you understand how lenders view your application. Improving your credit score before applying for a loan can lead to significant savings in interest charges and fees.

At O1ne Mortgage, we’re committed to helping you navigate the complexities of home equity loans. For personalized assistance and expert advice, call us at 213-732-3074. Let us help you achieve your financial goals with confidence.