5 Things to remember when shopping for home equity loans

[Feb 20, 2011.]

 

Home equity loans are cheap loans for financing a number of life's needs, such as college tuition, home improvements, or debt consolidation. If you have been considering tapping the equity in your home, stop to consider these 5 things before you start shopping around.

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1) How much money do you need?

Whether you need the money for college tuition, debt consolidation, or home improvements, know in advance how much you need to cover the full requirement. Make sure you borrow enough money to complete whatever goal you have set.

2) How long do you need the money?

The longer you borrow the money, the more interest you will pay. If you use your equity to purchase a car, you don't want to borrow the money for a 30 year term. Make sure that you plan on repaying the full balance in the same time frame that you might for an auto loan, or other type of installment program appropriate for the purchase.

3) How long do you plan to own the property?

Some home equity loans allow you to take 100 percent of your home's equity. If you might be selling your home in the next year, that could leave you short at the closing table for things like real estate commissions. Make sure that the amount of equity you access, and the time frame for selling the property, make sense together.

4) Are there cheaper financing options available?

Home equity loans are usually cheap loans. A home equity loan based on Prime Rate (3.25 percent) plus .5 percent margin would be cheap indeed. A 3.75 percent loan, which historically has not adjusted upward since December of 2007, is hard to beat. Nevertheless, check it out. Some credit cards offer 0.0 percent for a year or more. If your borrowing needs are short term, a 0.0 percent credit card could be cheaper.

5) Can you easily make the payments, long term?

Even though banking guidelines have tightened over recent years, it is still possible to borrow more than you can afford. Use good financial sense, and make sure that your budget will allow you to easily make the required monthly payments, long term. Consider the worst case scenario. If the home equity loan is adjustable, could you make the payment if it was caluclated at the Cap Rate?

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.