Loan Tips

Tips on Taking a Loan

Using a credit line to borrow against the equity in your home has become a popular source of consumer credit. And lenders are offering these home equity credit lines in a variety of ways.

Last Updated - 20th September 2005

You will find most loans come with variable interest rates, some come with attractive low introductory rates, and a few come with fixed rates. You also may find most loans have large one-time upfront fees, others have closing costs, and some have continuing costs, such as annual fees. You can find loans with large balloon payments at the end of the loan, and others with no balloons but with higher monthly payments.

No one loan is right for every homeowner. The challenge, then, is to contact different lenders, compare options, and select the home equity credit line best tailored to your needs.

The Basics of Home Equity Loans

Home equity loans allow a homeowner to borrow money by pledging the house as collateral.

Borrowers who want to borrow a relatively large amount of money or who don’t have good credit often find the home equity loan to be attractive.

Lenders may be more liberal because they view home equity loans as relatively safe. You can’t disappear with your house or hide it if you default on your loan, so the lender has a good chance of collecting the collateral. Also, you are likely to make your payments a priority if your home is on the line.

Advantages of Home Equity Loans

Home equity loans are attractive to borrowers for a few main reasons:

They typically have a lower interest rate

They are easier to qualify for if you have bad credit

Payments on a home equity loan may be tax deductible

Borrowers can get relatively large loans with this type of loan

Common Home Equity Loan Uses

Borrowers use home equity loans for some of life’s larger expenses, because homes tend to have a lot of value to borrow against.

Before using a home equity loan for any purpose, you should be aware of the pitfalls of these loans.

The main thing is that you can lose your home if you fail to meet the payment schedule required by the loan.

Another common pitfall of home equity loans is that scammers have found plenty of ways to cheat home owners out of their most valuable asset. Be sure that you know who you’re doing business with. If something smells fishy (like a high-pressure sales pitch or an inability to put things in writing), then take a step back and make sure the deal is legitimate.

How to Find the Best Home Equity Loans

Finding the best home equity loan can save you thousands of dollars – at least.

Be sure to review the home equity contract carefully before you sign it.

Do not hesitate to ask questions about the terms and conditions of your financing.

Shop around. Try a variety of sources (banks, brokers, and credit unions)

Manage your credit score and make sure your credit reports are accurate

Ask your network of friends and family who they recommend

Compare your offers to those found on websites and advertisements

To make the deal work out in your best interest, make sure that it is the right deal in the first place.

Plan out your budget ahead of time. Make sure that taking the loan will not overburden you.

Review and consider insurance to cover the payments if something happens. You may or may not need insurance. If you’re going to include it in your program, try to pay the premiums monthly – not up front.

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