| A home equity loan can give home owners access to a lump sum of cash for big expenses such as an auto or boat purchase, college tuition or the vacation of a lifetime. Home equity loans are second mortgages that are secured by the property. In other words, the home serves as collateral or a guarantee for the loan.
If you have a large expense or project on the horizon, a low interest home equity loan may be the best way to cover the costs. Here is what you should know about home equity loans if you are considering this option.
Conduct a Home Equity Loan Comparison Before You Apply
Investing time in home equity loan comparison is one way that borrowers can be sure they are getting the most value from their home equity loan. A home equity loan interest rate varies widely and:
- Even a small variation in basis points (one one-hundredth of a percentage point or the difference between 7.05 percent and 7.06 percent) can add up to several thousands of dollars in interest expense over the life of the loan
- You can compare home equity loan rates without supplying personal information (avoid giving potential lenders any identifying information such as your social security number until you are ready to apply – lender inquiries impact your credit score).
- You can use a home equity loan calculator to help you approximate your monthly home equity loan payment based on a variety of scenarios.
- Your decision should not be based solely on one factor. Consider all of the home equity loan terms and conditions together (including the total cost of the loan and any potential penalties) before you chose a home equity loan.
Home Equity Loan Refinancing Can Save You Money
Even if you agreed to a home equity loan without the best interest rate or terms, you may be able to correct your mistake by refinancing. Refinancing your home equity loan can be a good way to:
- Get a lower loan interest rate
- Take advantage of any lower, fixed rate loans that may now be available to you
- Help you start rebuilding equity with a loan that has shorter terms
- Avoid any looming balloon payments
- Make your home equity work harder.
Anecdotal evidence suggests that home equity loans are overwhelmingly used to consolidate debt, purchase cars or conduct other activities that produce no long term financial gain. Of course, the tax advantages make home equity loans more attractive than personal loans for handling these expenses. Still, it is important to understand that you put yourself in a very vulnerable position if you:
- Are unable to make payments on your home equity loan (home equity loans in default are subject to foreclosure)
- Max out your credit cards after you use your home equity to pay off their balances (where will you get the funds this time?)
- Have a major, unanticipated expense (you will no longer have the income from equity to meet the expense).
If you are considering a home equity loan as a way out of credit card debt, decide first how your habits will change so that you don’t recreate this scenario.Talk with your lender or financial advisor and read all materials related to your home equity loan. When you clearly understand what you are agreeing to you are less likely to agree to terms that hurt you in the long-run.
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