3 Tips Before Taking Out A Home Equity Loan

Posted on: 24 April 2018

Once you have owned your home for a while and faithfully made your mortgage payments each month, your equity in the home grows. While some homeowners look at this equity as a long-term savings strategy, it is also possible to leverage your equity in the short-term by taking out a home equity loan. If you are considering taking out a home equity loan, be sure to read these tips first:

Have a Good Reason for Taking Out the Loan

When handled wisely, a home equity loan can be a very helpful financial tool that helps you avoid higher interest debt in the form of credit cards. Home equity loans are a serious matter that require consideration, however, since your home is used as collateral for the loan. It's best to avoid taking out a home equity loan to pay for something unnecessary and fleeting, like a vacation or a nicer car.

Home equity loans can make a lot of sense when they're used for something savvy, like making improvements to your home which will in turn increase the value. Another example of a good reason to take out a home equity loan is to pay college tuition if the interest on the loan will be lower than that for a student loan.

Shop Around for a Lower Interest Rate

Even a couple of points difference in your interest rate will have a big impact on how much you pay each month, how long it will take to pay the loan, and how much you will end up paying back overall. It pays to shop around and find a competitive interest rate. If your credit isn't as high as it could be, it's worthwhile to spend some time working on improving it in order to be offered a home equity loan with a more attractive rate.

Consider a Home Equity Line of Credit

If you are unsure of how much you want to borrow, a home equity line of credit may make more sense. With a line of credit, you can borrow more as your needs change, for example at different stages of a remodeling project. A home equity loan, on the other hand, is issued as a lump sum. One benefit of a home equity loan is that the rate and payments are fixed, while a home equity line of credit can be variable and your payments may increase over time.

Taking out a home equity loan is something that should be approached in a deliberate and cautious manner. Following these tips and finding a low rate home equity loan with low interest will ensure you are happy with your decision to take out a loan.