3 keys to getting a mortgage, BEFORE you apply

Anyone who has applied for a home mortgage loan recently knows how elusive the best interest rates, loan terms and ultimate mortgage loan approval can be. The good news is that steps can be taken to vastly improve the odds.

This is not your father’s loan environment but may bear some resemblance to your grandfather’s. Before the terms subprime mortgage, real estate bubble, andshort sale were even a glimmer in the eye of Wall Street mortgage securitization moguls, old school bankers sat at their old school desks and approved or denied mortgage loans based on old school standards. Our grandparents wouldn’t have even considered asking the local banker for a loan without first “putting on their Sunday best.”

Related: Housing market stuck in downward spiral: Shari Olefson

Hopeful homebuyers vying for a mortgage loan in today’s environment are well served to do the equivalent. But modern-day loan decision-makers seldom meet the borrowers whose homeownership destinies lie in their hands. This necessitates looking polished on paper and thinking of a loan application as a financial resume. The application is where loan underwriters garner their first impressions about borrowers, and if those impressions are not good, it’s game over.

Appiicationsfor home purchase rose 2.6% in the Mortgage Bankers Associations most recent weekly survey, but thats up from a 6-month low.

Related: Why the housing market is suddenly struggling

So what does it take for a mortgage borrower to look polished on paper? The answers are simple, though achieving them often takes time:

  • A good credit score – preferably 720 or higher
  • A big down payment – ideally as close to 20% as possible
  • A low debt-to-income ratio (DTI). A best case scenario comes close to 30% on the front end — income compared to housing debt cost — and 40% on the back end — income compared to all debt costs).

While loans are certainly available at lower thresholds, a high credit score, big down payment and low DTI translate into the very best loan terms, including the lowest available interest rate, and tens of thousands of dollars in savings over the life of a loan. Borrowers with hefty assets generally have more leeway skimping on the credit score, down payment and DTI than those who don’t.

Related: New signs the housing market is approaching normal?

The problem is, average credit scores today are 40 points or more less than optimal, which means most borrowers need to find time to write to credit bureaus, pay down balances and improve scores before applying for a mortgage.

Twenty-five percent of renters today spend over 50% of their income on rent, and down payments, which not long ago averaged 3.1% of income, now average a whopping 7.5%. That means many need to cut back on spending or take on a second job to save for a down payment before homeownership is even considered.

In addition, student debt is driving up debt-to-income ratios for many first-time buyers, creating the biggest challenge. For these and other reasons, many borrowers need six months or more to polish themselves up on paper, which makes planning ahead key.

Dont be shy: The home loan process is no place for shy folks. Getting the best deal requires asking questions, shopping for service providers and negotiating because mortgage loan closing costs are up 6% since 2012. The good news is some of those costs are negotiable, but only for folks who take the time and muster up the gumption to ask. Again, its time well spent, which can translate to hundred of dollars in savings.

Creativity can also pay off in spades. For example, as interest rates rise, expect to see more homebuyers asking sellers to kick in some cash to help buy down the loan’s interest rate. And conservativeness is always a good trait when it comes to home loans. There’s no rule that says homebuyers have to spend the full amount a bank issues a loan approval for. Spending less leaves more cash available for saving, emergencies or just plain old fun. A home is a financial stepping stone, not necessarily a dream home, particularly for first-time buyers.

Features, such as square footage or property condition, are often fixable over time. And understanding the actual cost to carry that extra bedroom or super-sized yard may lead many a buyer to re-evaluate home-shopping priorities.

Condominiums and townhouses can also be a great alternative for buyers determined to live in a neighborhood that might not otherwise be affordable and they often provide more predictability when it comes to maintenance.

The mortgage loan application process certainly has its fair share of uncontrollable moving parts. All the more reason for borrowers to take the proverbial bull by the horns wherever the opportunity to do so arises.

Shari Olefson is a real estate attorney and CEO of The Carnegie Group, a real estate and financial consulting cooperative. She is the author of Financial Fresh Start and Foreclosure Nation.

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Credit card & commercial real estate business improves

Banks are showing an uptick in credit card and commercial real estate business. The growth, registered in both the segments, has been significantly higher in July this year as compared to the growth registered a year ago.

Lenders have been witnessing robust growth in the credit card business, suggests the Reserve Bank of India data on sectoral deployment of bank credit.

For the month of July, the credit card outstanding was Rs 27,300 crore, showing a rise of 18 per cent, as compared to a mere 4.4 per cent growth in 2012-13.

Bankers explain that an increase in e-commerce and attractive discounts being offered by banks on the credit cards has led to an increased usage of plastic money. Industry players say that the number of credit cards is increasing, albeit slowly but the spending on credit cards has been increasing steadily with some banks seeing a rise of up to 30 per cent on a year-on-year basis.

Even the commercial real estate space has shown a significant improvement with credit to the sector increasing by 18.2 percent in July this year as compared to last year. With a gradual improvement in the economy, a further pick-up in the real estate market is expected, say experts

In the personal loan space, even the consumer durable market has witnessed an improvement, with retail credit growing to Rs 14,100 crore in July as compared to Rs 9,200 crore in June last year. This comes despite the fact that the country has witnessed a weaker than expected monsoon and the growth in the consumer durable market has not been as good as expected, say industry players.

With the festive season starting in August, the consumer durable, auto and the credit card market is expected to pick up further. In order to boost demand, bankers and the other industry players have doled out special offers in order to attract consumers.

Even credit to the auto sector has increased by 17.9 per cent to Rs 1,377 crore in July as compared to Rs 1,168 crore in June last year. The auto sector has seen a revival in off take after demand being sluggish for several months.

In the overall personal loan space, certain other sectors such as education registered a slower growth than last year. Credit to the education sector that was one of the key focus areas increased only by 1.9 per cent in July as compared to March this year.

Credit to the services sector increased by only 12.3 per cent in July this year as compared with the increase of 13.3 per cent a year ago

Credit to Non-Banking Finance Companies or NBFCs increased by 11.5 per cent in July 2014 as compared with the increase of 5.7 per cent in the same period last year.

Credit to agriculture also registered a strong growth of 19.5 per cent in July, up from 10.5 per cent in the corresponding period last year.

Getting A Secured Credit Card

According to a poll conducted by the US Federal Reserve, almost 30% of respondents who had applied for credit said that they had been turned down for credit in the past 12 months and almost 15 percent received less than they asked for. The poll, which was conducted in September 2013 and published in an economic well-being study released in July 2014,  indicates that some Americans are still struggling to rebuild credit possibly destroyed during the Great Recession.

If you’re trying to rebuild your credit, there is a way. Secured credit cards allow consumers to make a deposit into the issuing bank for the amount of the credit line and make purchases based on the account balance. They work like a debit card, but also help people needing to build or rebuild a credit history.

“Most secured credit cards report to the major credit bureaus, but be sure you confirm this,” says Beverly Harzog, a credit card expert and author who specializes in secured credit cards. “The point of using a secured card is to either build or rebuild your credit. So if your payment history isnt reported, your credit history and your FICO score won’t improve. If it isnt clear in the fine print, call the issuer and ask.”

The good news is that secured card information isn’t reported differently on your FICO score than data from a non-secured card. As long as you use it wisely, having a credit card can help your score in multiple ways:

  1. 30% of your FICO score is based on the amount you owe on your credit accounts, compared to the amount of available credit. Keeping your balance 20% less than your cards credit limits can help your score.
  2. 10% of your score comes from the types of credit you have and use, such as credit cards, installment loans and your mortgage.
  3. In time, using credit wisely will help your payment history, which is 35% of your score, and the length of credit history, which is 15% of your score.

Choosing the Best Secured Credit Card

Consumers must always be careful about which secured credit card they applying for. Some cards don’t report to credit bureaus and some have high fees, says Harzog.

Five Factors That Impact Your Credit Score

With banks and RBI becoming more and more stringent about the loan eligibility of borrowers, you are probably aware by now that it is imperative for you to have a good Cibil score in order to qualify for a loan with an attractive rate of interest. In order to obtain a good Cibil score, you need to maintain a good credit history, the details of which will show up in your Cibil report. The Cibil score can, therefore, be compared to a grade or a rank based on how you have been servicing your credit.

Now that you know the link between your credit history and credit score, you are naturally keen to do all you can to keep your Cibil credit score as high as possible. But have you ever wondered what goes into the constitution of your Cibil score? Here is a lowdown on the factors that have the greatest impact on your Cibil score.

Your repayment history (35%)
The first and most important thing that impacts your credit score is your repayment history and it accounts for 35% of your credit score. You need to clear all your bills and loan repayments well within the dates stipulated in order to maintain a good repayment history. Even a single default has a negative impact on your score.

What you owe your lenders (30%)
There are two basic considerations when it comes to calculating what you owe your lender, which is referred to as credit utilization. First is the total of your credit card limits sanctioned to you and secondly, the percentage of your money you are utilizing. Hence, your credit utilization ratio is calculated as balance outstanding on all your credit cards as a percentage of total credit limit on all your credit cards. If your credit utilization ratio is upwards of 30%, you profile as a customer is considered to be risky.

How long have you been servicing debt (15%)
This may come as a surprise, but the amount of time you have been using credit also has an important bearing of 15% on your credit score. Therefore, if you have been servicing debt for a longer period of time and handling it responsibly, ie, by making timely repayments, it is going to have a positive impact on your Cibil score.

The amount of new credit you have taken or applied for (10%)
Every time you apply for a new credit such as a loan or credit card, the banks and other financial institutions run an inquiry on your Cibil report to check your credit history to find out about your financial health and repayment capability. If there have been too many such inquiries on your Cibil report, it has a negative bearing on your credit score. This factor has a 10% weightage when it comes to calculating your credit score.

The mix of credit (10%)
Even though ours is primarily an EMI-led generation, Indians are, by nature, averse to the idea of credit. So if you have been avoiding credit like the plague and have a single type of credit, you cannot have a good credit score, especially if you have only unsecured loans like credit cards or a personal loan. This factor has a bearing of 10% on your Cibil score. In order to score high on this ground, you must have a healthy mix of credit comprising of secured and unsecured loans and have the ability to service them well in time. Those with a mix of various credit types such as mortgage, personal loan, car loan, credit card, etc are likely to score higher than those who have a single type of credit.

Now that you know what goes into the constitution of your credit score, you can use this information to find out the areas in which you are lagging, and thus improve your credit score. A good credit score will ensure that you get a loan without any hassles at best interest rates when you really need one.

About the author: Rajiv Raj is the director and co-founder of www.creditvidya.com

My biggest credit card mistake: Experts share their stories

How to learn from our mistakes

Credit cards are so popular because they are secure, convenient and very easy to use for spending. But behind this simple facade, we all must take extra precautions to ensure that we are using our cards responsibly, and accurately paying our bills.

While its true that a mistake — whether missing a payment or maxing out your cards — can lower your credit score, if you identify the problem and work to get back on track as soon as possible, you can be on your way to better credit. You can see how your credit cards are impacting your credit score for free on Credit.com, where youll get two scores updated every month, plus a personalized plan to help you get back on track. You may also want to pull free copies of your credit reports (you can do that once a year with each of the three major credit reporting agencies), and see how your credit cards are being seen by lenders.

More from Credit.com

  • How to get a credit card with bad credit
  • How to lower your credit card interest rates
  • Should I close a credit card account?

How Bad Credit Can Cost You, Big Time

Credit in America

As of 2012, the average American had a credit score of just under 690, which is only a so-so score, and according to data published on Card Hub, around one-in-three (35 percent) consumers had a score under 650, which placed them in the below-average or bad credit range.

Why do people have bad credit? Of course, financially literacy issues, high debt, and inadequate budgeting play a role. Then there are those who damaged their credit immediately upon reaching adulthood. This can take time, energy, and money to repair that some people simply dont have. Other times, bad credit is the result of financial struggles where people simply dont earn enough money to cover their expenses for those individuals, bad credit comes along with being broke.

Having bad credit often results in a vicious cycle. Your mortgage payment on a home, or your payment on a vehicle, is substantially higher than it would be if you had good credit. You may be financially struggling to pay debts, thereby leading to having bad credit in the first place, which therefore leads to higher rates and payments for future debts, which then leads to more financial troubles down the road. It all comes around full circle.

As if high APR and difficulty being approved wasnt bad enough, having bad credit can even cost you job opportunities. According to data published on CNN, from 1998 to 2010, the percentage of employers who checked all or some of their candidates credit files rose from 25 percent to 60 percent. Your credit can deter you from obtaining a job for which you are qualified.

When opening accounts for utilities, like electricity or water, your credit score can be the difference between paying a deposit and signing up without any form of collateral. Even when changing cable or satellite dish providers, a poor credit score may result in a hefty deposit. Since businesses view those with bad credit as a risk, they take measures to protect themselves in spite of the financial impact this may have on certain consumers.

Rep. Paul Ryan on ISIS, James Foley & Ferguson

I do think the President completely misdiagnosed the situation in foreign policy. I think he made some critical mistakes in Syria and Iraq, said Republican Congressman Paul Ryan.

Ryan is out with a new book, The Way Forward: Renewing the American Idea. Many are wondering if the book may lay the foundation for a presidential campaign in 2016. While Ryan hasnt weighed in on a potential run, his comments on foreign policy show he has a clear stance on many of the issues likely to dominate the next presidential campaign.

The threat from ISIS

Just last month, President Obama referred to the Islamic State of Iraq and Syria as a JV team, a characterization Ryan critiques. Still, he acknowledges, I am a little surprised that they were able to rise so fast.

The intelligence community has been warning about ISIS for some time though, said Ryan. I think the President has made some huge missteps.

Ryan on James Foley

Chief among Ryans complaints is the lack of a clear strategy from the White House on how to tackle the terrorist group responsible for beheading American journalist James Foley earlier this month.

I dont want to see a plan to contain or react to ISIS, he said. I would like to see a plan from the Commander in Chief on how to defeat ISIS fully.

For Ryan, the murder of James Foley hits close to home. Foley attended Marquette University in Ryans native Wisconsin.

But Ryan supports the US government policy of not paying ransom for hostages. Earlier this week, Peter Theo Curtis was released by another Syrian terrorist group, Jabhat Al-Nusra, leading the administration to reiterate that policy.Curtis returned to the US today after two years in captivity in Syria.

We all feel the loss very accutely for James Foley in Wisconsin, Ryan said. He graduated from one of our great institutions, Marquette University, and I cant imagine the pain his family is going through. At the same time, I think it would be a mistake for the US to pay ransom or to negotiate.

It is suspected that ISIS released other hostages held with Foley following ransom payments from European governments funneled through intermediaries. Most European governments officially deny that they pay ransoms, but reports from the Treasury Department say millions of dollars flow from European government to terrorist hands. It is largely thought to be the primary source of funding for terrorist groups like Al Qaeda.

We do not want to create a system which incentivises the taking of civilian Americans as hostages by terrorist groups.

Global reaction to Ferguson

Golodryga also asked Ryan about the scope of reaction to the protests in Ferguson, Missouri. Following the shooting death of unarmed black teen Michael Brown by police, protests errupted not just in Ferguson, but as far afield as Gaza. Even Russian President Vladimir Putin weighed in.

Ryan, though, believes everyone should take a step back before commenting. Let the investigators do their jobs, he said. Lets not prejudge anything. Lets mourn for the Brown family, for the community and lets make sure that justice can be served so that the facts can be gathered.

And despite the global outcry about events in Ferguson, Ryan cautions about confusing domestic events with foreign policy. I dont think it is wise to link various events around the world with each other, he said.

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3 Ways to Improve Your Credit Score in Less Than 5 Minutes

If you are looking to buy a car, rent an apartment or take out a loan, you need to make sure that your credit score is at its best. While it takes seven years for most derogatory items on your credit report to be removed, there are a few things you can do to raise your credit score sooner.

Pay off your credit card balance

This is the easiest way to improve your credit score quickly. One of the major factors of your credit score is how you are using your credit. A big factor of that is your credit utilization ratio. This ratio compares your overall credit limit with the amount of credit you are currently using. Say you have an overall $10,000 credit limit and are carrying a balance of $5,000 total across your credit cards, then your credit utilization ratio would be 50 percent. Most credit experts advice to keep your credit utilization ratio below 30 percent, but if you can get it to zero, it will help dramatically raise your credit score.

If you cant pay off your entire balance, even paying off a little can help. The lower your credit utilization ratio, the more available credit you have and the better you look to outside lenders. Even paying of 10 or 20 percent of your overall balance can help.

Get a new credit card

Taking out more credit may seem counter-intuitive, but adding to your overall credit limit will raise your credit utilization ratio. Here are the two ways that getting a new credit card can help raise your credit score:

Increase your credit limit: A new credit card will increase your overall credit limit, which in turn lowers your credit utilization ratio. The more credit that lenders approve you for, the more trustworthy you seem to other lenders. As a bonus, look for a credit card that has some great perks like cash back incentives, so you can earn money while you use it. Here is a good list of the best cards with great perks.

Transfer your balance: If you are carrying a balance on your credit cards, you can kill two birds with one stone. If you transfer your balance to a new balance transfer credit card, you can increase your overall credit limit while also being able to pay down your credit card balance. Even better, find a credit card that offers a 0% intro APR for up to 14 months so you will have time to pay down your balance without being charged extra interest on it. These are some good all-around credit cards with a 0% intro APR for balance transfers.

Fix errors on your credit report

If you have errors on your credit report, fixing them is an easy way to raise your credit score. Errors can include a credit lender reporting false late payments, accounts that reportedly went to collections even though you paid, or even accounts opened in your name without your knowledge.

First, you need to pull your credit report see if you have any errors. The government allows each person one free credit report each year from each of the three credit bureaus (Equifax, TransUnion and Experian). You can get these reports from annualcreditreport.com. Look over each credit report for any errors. Each credit bureaus website includes instructions on how to file the paperwork to get an error fixed.

If you dont want to go through the effort of fixing errors yourself, you can also hire a credit repair company to send fix requests on your behalf. Keep in mind that credit repair companies might try to convince you to try other ways to fix your credit, but you are paying by the month, so make sure they are focusing on your errors. Here are the two best credit repair companies compared side by side.

Credit Cards For People With Bad Credit

Consumers with poor credit scores were once locked out of the credit card game. But lenders are beginning to court those whose low scores once typed them as too risky to be offered a credit card.

In the first quarter of 2014, 3.7 million subprime borrowers - those with a FICO credit score below 660 - were issued credit cards, according to Equifax, Inc. That’s a 39% jump from 2013 and the highest level since 2008, according to Equifax data provided to the Wall Street Journal.

Federal regulations tying the hands of card issuers wanting to raise interest rates on existing balances have convinced banks and other credit card issuers to do business with consumers who otherwise might not be offered a card.

That’s good news for consumers with poor credit scores who hope to rebuild their credit with the help of subprime credit cards.

Not surprisingly, the cards offered to those with less-than-stellar FICO scores are accompanied by an array of less-than-stellar fees and interest rates – far removed from the attractive incentives typically offered with prime credit cards. Other than a prepaid card, which doesnt offer any credit and works like a gift card, people with poor credit have two basic choices.

Subprime Credit Cards

Like prime cards, subprime credit cards dont require borrowers to deposit money with the bank before they use them. Thats where the resemblance stops. Subprime borrowers can expect to pay maximum interest rates, higher fees and possibly an annual fee, says Igor Tselenchuk, a personal finance and credit card expert in San Francisco. Rates for new purchases can go even higher if you are late with a payment or skip one altogether.

To reduce their financial exposure in the event a consumer defaults, credit limits are often initially set low on subprime credit cards. And very few subprime credit cards offer rewards incentives and perks. Those that do often package those rewards with steep interest rates and fees. For instance: Credit One Bank Credit Card with Gas Rewards card offers 1% back on all gas purchases and there’s no limit to the gas rewards you can earn. However, there’s an annual fee of $35 to $99 and a variable ongoing interest rate of 17.9% to 23.9%. 

Interest rates can go much higher. The First Premier Bank credit card has a whopping 36% interest rate for purchases and cash advances. There’s also a one-time processing fee of $75 and an annual fee of $75 the first year, $45 for additional years. On top of that, cardholders are charged a servicing fee of $6.25 per month after the first year. Some of these fees are charged before you ever use your card and will reduce the amount of credit you initially have available. For example, if your initial credit limit is $300, your initial available credit will be only about $225.

4 tips for using home equity

Remember, borrowing against your home puts it at risk of foreclosure if you cant pay the bill. For most purchases, that risk isnt worth it.

HELOCs can be an excellent money management tool when used properly, says California-based mortgage consultant Greg Cook. Unfortunately, many consumers used them as ATMs during the housing bubble and as a result found themselves in worse financial shape than when they started.

If youre thinking about borrowing from your homes equity, take a conservative approach.

Our 4 tips will help get you started.

1. Choose your loan wisely.

Home equity rates are very attractive right now.

An average $30,000 HELOC costs 4.86%, while home equity loans charge 6.10% interest on average, according to our most recent survey of major lenders.

Both offer lower interest rates than most other forms of consumer credit, and the interest is typically tax-deductible.

But they arent as easy to get as they once were.

Credit score and loan-to-value requirements are considerably more stringent than they were prior to the housing crash, Cook says.

Lenders often require borrowers to have a combined loan-to-value of no more than 90%, he says.

That means if your home appraises for $300,000 and your mortgage principal balance is $200,000, you might be able to borrow as much as $70,000 with a home equity loan or line of credit. Youd retain 10% equity, or $30,000.

Some lenders require 80% loan-to-value.

To get the best interest rates with most lenders, youll need a credit score of at least 740, says Gregory B. Meyer, community relations manager for Meriwest Credit Union in San Jose, Calif.

If you can tap your home equity, its a much cheaper way to borrow than, say, using a credit card. But you wont lose your house if you default on a credit card.

There are two ways you can borrow from your homes equity:

  • A home equity loan lets you borrow a lump sum and pay it back over a fixed term at a fixed interest rate (like a mortgage or car loan).
  • A HELOC works more like a credit card. It makes a certain amount of credit available on an as-needed basis for a limited term, such as five or 10 years, followed by a repayment period of up to 20 years. Its interest rate changes with the market.

A home equity loan makes sense if you need a large amount all at once for a specific project.

A HELOC might make more sense if you need to borrow smaller amounts over a longer period.

You might be tempted to choose a HELOC because of its lower interest rate.

But since todays interest rates have almost nowhere to go but up, a HELOCs variable interest rate could end up costing you much more over the loan term than a home equity loans fixed rate, even though the fixed rate is higher initially.

HELOCs have another significant drawback.

Most HELOCs will have a feature where the lender can freeze the line of credit at any time for instance, if the lender believes the value of the home has dropped significantly since the line of credit was opened, says loan officer Hillary Legrain of First Savings in Bethesda, Md. So that line of credit you open may not always be available to you in the future.

For either option, youll need to provide full documentation of income and assets and an appraisal, she says.

2. Calculate your own repayment schedule.

If you choose a HELOC, take steps to reduce your risk.

HELOCs typically offer some initial flexibility in how you repay them.

During the draw period, usually the first 10 years, you can make interest-only payments.

However, if you only pay the minimum now, youll experience payment shock later when the full monthly payments, including principal, kick in.

Its not safe to assume youll be able to afford the higher payments in a few years, especially because the interest rate could increase in the meantime.

Were seeing the effects of consumers faulty assumptions right now.

About 40% of all outstanding US home equity loans are at or near their 10-year mark, and borrowers are increasingly missing their payments, which have already doubled or tripled and will jump even higher when interest rates increase, Reuters reports.

You also may not want to choose the longest loan term possible.

A better option is to pay the loan back quickly to minimize the amount you pay in interest, get rid of the monthly payment and eliminate the risk of having your home as collateral for a secondary purchase.

Our line of credit calculator can help you do the math and determine how long it might take to pay off your credit line.

3. Limit your use of equity.

Borrowers traditionally have used their homes equity to pay for everything from cars to planned renovations.

Today, auto loans are both less risky and cheaper. And the prudent approach to home renovations is to use cash if you can. It doesnt make sense to pay interest on a project with a negative return.

There are few appropriate uses of home equity loans, because it doesnt make sense to put your shelter at risk for nonessential purchases, says Cecily Welch, a certified financial planner and certified public accountant with Welch Financial Advisors in Atlanta.

Welch says one appropriate use is to make essential home repairs of things that wouldnt pass a home inspection in order to sell your home.

With rising college tuition and borrowing costs, you might be tempted to use home equity to pay for your childs tuition. The interest rates can be lower than those on student loans, especially private student loans.

But a cash-out refinancing on your first mortgage could be even less expensive, since first mortgage rates are below home equity loan rates. Youll need to compare the interest rates and closing costs to see which option is cheaper.

Financial experts say you shouldnt sacrifice your own future to help your child pay for college, though.

While we dont recommend leveraging all of your equity to pay for school, using a HELOC for short-term cash flow is a much better option than putting part of a semesters tuition on a credit card.

4. Use equity to cut your interest payments.

You could use the loan proceeds to pay off all your high-interest credit card debt and diminish the damage from your past mistakes by repaying your debts at the home equity loans lower interest rate.

Paying off consumer debt with tax-deductible funds can improve a homeowners overall financial situation if they use the savings to reduce the balance of the equity line, Cook says.

In other words, if you just make the minimum interest-only payments and stretch out your debt for another 20 to 30 years, you wont come out ahead.

If the debt consolidation will save $500 a month, apply at least 50% of the savings to pay down the principal balance of the home equity line, Cook says.

Keep applying the interest savings to the new loans principal balance until youve repaid the total amount in full.

Borrowers also have to change their spending habits, or they will get back into the same or a worse situation with their bills, Meyer says.

This article originally appeared on Interest.com.