Planning to Take A Home Equity Loan? The Do’s and Don’ts Of It

Perhaps you want to finance big-ticket expenses like your children’s college education, you’re suddenly faced with large and unexpected medical bills, or you’d like to carry out major home-improvements or repairs. A great way of coming up with the funds is to opt for a home equity loan. Based on your credit history and loan-to-value ratio of your property, you could take out a safe and convenient loan against your home.

What Are Home Equity Loans?

They are loans taken using the borrower’s home’s equity or market value as a collateral. Equity is calculated using the difference between the market-value and the outstanding mortgage balance.

Home equity loans have recently been making something of a comeback after many lean years in the market. For those with a good credit-rating, the rates are lower than with other forms of borrowing like personal/auto loans or credit cards.

Risks

Home equity loans may be easy to get if you fulfill the eligibility criteria and they make financial sense if you have the equity, but there are several inherent risks:

• Variable or floating interest rates – they could always rise in the future

• Too easy to spend – you could end up with “buyer’s remorse” after splurging on a bunch of unnecessary stuff

• Full repayment – if you’re not financially savvy and keeping a tight rein, you could find yourself in trouble at the end of the loan period

• Loss of property – defaults result in foreclosure and you could lose your home itself

That’s why exploiting the value of your home can be extremely risky if you undertake a home equity loan without complete understanding of the process and its repercussions.

Do’s and Don’ts

Protect yourself and your family by educating yourself thoroughly before undertaking a home equity loan. It could be a disaster in waiting if you’re not aware of the implications and repercussions.

Here are some pointers to keep in mind:

Do’s

• Remember that it is still a form of mortgage

• Keep meticulous records of all repayments and charges including billing statements, bank records, canceled checks etc. so you can challenge inaccuracies with solid proof.

• Read the loan contract very carefully

• Never engage unlicensed contractors to do work on your home

• Use the loan amount to undertake genuine improvements in your home or whatever specific purpose you’ve taken the loan for

• Loan amount can be used to tide over unexpected events/crises if you don’t have an emergency fund

• It can be used to build a nest-egg for retirement

• Check if tax benefits or deductibles are available

Don’ts

• It’s tempting, but never use your home equity loan to splurge on a bigger TV, boats, cars, cruises, vacations, etc

• If you’re planning to sell your home soon, avoid taking a home equity loan

• Don’t take out an unnecessarily large loan – keep it realistic. If the market drops you could be stuck with a massive repayment situation

• Don’t get pressurized by heavy marketing tactics – educate and inform yourself

• Consult your family before taking out a loan

• Never sign documents that have blank spaces or one you haven’t read thoroughly and understood

• If necessary, get documents vetted by an expert

• Evaluate your repayment capacity and judge whether you can really afford it

Today, interest rates are at a historic low and the economy is looking up. Many property owners are considering taking out a home equity loan and it’s indeed a great option if you have the credit-rating and eligibility. Plus if you’ve also evaluated the risks and benefits completely, approached a reliable, well-established and reputed institution or organization and done your research well.

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