Four Common HELOC Mistakes and How You Can Avoid Them

[Jan 27, 2009.]

 

1. Confusing "Term Rates" With Introductory Rates
Occasionally, homeowners fall into the trap of confusing the actual interest rate on their mortgage with an introductory rate. Even though stress levels may be high, it's important to closely examine the details of your home equity loan. With home equity lines of credit, it's quite common for the advertised rate to be an introductory rate - or it might carry an introductory margin. To avoid any surprises and payment shock, take a second look at the interest rate for the life of the loan or the fixed margin applied by the lender.

2. Overestimating Their Homes Appraisal Value
Home equity loans and lines of credit are typically second lien mortgages which add onto an existing mortgage. As a result, it's crucial that homeowners make sure their home carries enough value to afford an additional mortgage. Especially in this housing market, homeowners need to be sure of the value of their home before starting the mortgage process. In addition, keep in mind the local trends around your community as it can be quite devastating to be trapped with negative equity.

3. Getting Preoccupied With Mortgage Distractions
Don't' let plans of home improvements or debt consolidation get in the way of sound financial decisions. Avoid getting distracted and remember to pay close attention to the details of your mortgage. Review your loan qualifications, budgeting concerns, interest rates, and any fine print that needs to be explained. Between home appraisals and signing loan documents, some homeowners get overwhelmed by all the pressure and unfortunately make decisions which they soon regret.

4. Allowing Short Term Needs To Overpower Long Term Plans
When some homeowners begin the loan process and move one step closer to receiving their funds, it can be easy for some to get sidetracked. Stick to your original plan and don't make the mistake of borrowing more money just because you can. If you're planning on upgrading your home, don't fall into the trap of making one last addition and borrowing just a few more thousand.  For those cashing out their equity, remember that high loan to value ratios make refinancing in the future quite difficult. In some cases, simply having a home equity loan can make refinancing your first mortgage difficult. Find out from your existing lender or mortgage broker if obtaining a HELOC will pose any problems in the future.

 

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.