Does it Make Sense to Borrow Money for Repairs and Upgrades Prior to Selling
Especially since the Covid pandemic began in 2020 (but also for a couple of years before that) home prices have been surging in most localities across the country. As a matter of fact, homeowners are now sitting on a record 22.7 trillion in equity. This represents the highest amount ever recorded. And because home values have skyrocketed, lenders are more likely to offer loans, as the value of the home is more than enough collateral for the banks to feel comfortable in case of a default.
The question then becomes: Does a homeowner who taps into his home equity for a renovation, for example, need to worry about his credit rating being lowered? According to LendingTree, the answer is an emphatic, no.
LendingTree conducted a study, released in June 2021 of 1,500 home equity loan requests in 40 of the nation’s largest metro areas. The study found that homeowners do see a small dip in their credit rating in the near term, immediately upon taking the loan (about a year). But after this brief period, the overwhelming majority of borrowers, see their credit scores return to its previous state in less than a year’s time.
Borrowers across the 40 metro areas saw an average decline in credit scores of 17.5 points in the immediate months following a home equity loan. Across the metro areas studied, the average credit scores of the borrowers were 727. This credit score average is high enough that a drop of 10 to 20 points isn’t likely to have a serious impact on cost or accessibility to credit.
Credit scores took about 3.5 months after closing on the loan to show a dip. But credit scores began to see a recovery from their low points in about 96 days. Scores tended to fully recover to their pre-loan average in well under a year. On average, a fully recovery of the credit score occurred in 201 days.
Whenever a person takes on significant debt, their credit scores generally fall. But as time passes, making timely payments actually helps borrowers improve their credit score, as the borrower demonstrates to the lender that they are quite capable of paying off the loan through monthly on-time payments. The final result of paying off the loan often serves to raise one’s credit rating to its highest point ever.
Here are a few tips to raise your credit score quickly back to where it belongs after taking the home equity loan:
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After taking a home equity loan refrain from taking other loans until your credit score recovers.
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Use as little of your credit loan as possible. By keeping your credit utilization low, you can expect your score to improve quickly.
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Very important: Be sure to make all your monthly payments (including your loan) on time. Failing to do this will generally lower your credit score.
Having a high credit score will make it easier for you to successfully get a loan, and a high credit rating is likely to lower the interest rate you are charged on future loans, potentially saving you thousands of dollars.
The bottom line: Don’t overly concern yourself about a falling credit score upon taking a home equity loan. If you follow the three points listed above, you should be fine, as your credit rating returns to its pre-loan level in well under year – and may very well hit a new high as you demonstrate your desire and ability to pay off your loan in a timely manner.