Introduction
When you take out a home equity loan or line of credit, you are borrowing money against your home. If you overextend yourself, you may put yourself at risk of foreclosure. Thus, before obtaining a home equity loan, you should review your financial situation and shop around for the best deal.
Investigating Your Home Equity Options
Shop Around. As with any mortgage, you should shop around for the best deals.
Get information about the loan. Know your interest rate and closing costs. Will interest be variable, as is common with home equity loans, or will it be at a fixed rate? If the rate is variable, what rate cap does the lender offer? Will you be able to convert the loan to a fixed rate loan if you later choose?
Loan or Line of Credit? You will typically have the option of obtaining either a home equity loan, or a home equity line of credit. Please note that the annual percentage rate (APR) for a loan typically incorporates points and finance charges, whereas the APR for a line of credit typically reflects only the interest rate charged. You must consider that difference when assessing the total cost of a loan against a line of credit.
o With a loan, upon closing you would receive payment of the amount borrowed.
o With a line of credit, you will typically receive a check book, and will be able to write checks against the equity in your home up to the amount of the line of credit.
If you obtain a home equity line of credit, you should make sure you understand all of the terms - For example, will you have to make monthly payments toward the total principal of your debt, or will you be required to pay only the interest? When will you have to repay the loan? Under what circumstances can the lender limit your line of credit?
Fees and Costs. Know the fees associated with your home equity loan. Some lenders will charge an annual fee with a home equity line of credit, whether or not you actually use it to borrow money. If you will be moving relatively soon, consider if it will be worth borrowing against your home given the fees you will incur.
Repayment. Know the terms of repayment, and the amount of any fees that might become due upon repayment.
Exercise Caution
Watch for inappropriate conduct by home equity lenders, including the following:
Bait and Switch: The lender offers one set of loan terms when you apply for the loan, attempts to impose higher charges when you sign to complete the transaction. Such a lender may attempt to distract you from the terms of the contract, to use pressure tactics to get you to sign or prevent you from reading its terms, or may even misrepresent what the contract says.
Equity Stripping: The lender gives you a loan based on the amount of equity in your home, even though you will find it difficult or impossible to make the loan payments given your income. If you are unable to make your payments you may lose your home.
Credit Insurance Packing: The lender adds credit insurance to your loan, perhaps at a substantial cost, even though you may not want or need credit insurance. If you need credit insurance, consider applying for coverage through a source other than the lender.
Loan Flipping: The lender encourages you to repeatedly refinance your loan, perhaps also encouraging you to borrow additional funds each time you refinance. Each time you refinance the loan you pay additional fees and points which profit the lender, but also increase your debt.
Deceptive Loan Servicing: The lender provides inaccurate, incomplete, or misleading account statements and payoff figures. As a result, it is extremely difficult for you to determine how much you have paid or how much you owe, and you may end up paying more than you actually owe
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