Home equity loans and lines of credit (HELOCs) can enable you to tap into the equity in your home to access extra cash for any number of reasons; from home improvement projects and paying down debt, to education costs and even big-ticket purchases! Because you’re using your home as collateral for the loan, and the risk is considerably lower to the lender, they often come at lower rates than other types of loans. You may also be able to qualify for even larger amounts depending on the total equity you have. However, when considering a home equity loan, it’s important to look beyond just the current interest rate if you want the best deal. This could provide significant long-term savings. To help, we put together a list of six things to consider when shopping for a home equity loan.
Six Important Considerations When Shopping for a Home Equity Loan:
- Are there any tax benefits? We all have to pay them, so why not try and use what you have to possibly catch a break? A home equity loan may have potential tax benefits, especially if you are using the funds for property improvements. You may be able to deduct all or a portion of the interest you pay. Speak to your tax advisor about any potential tax benefits so you can factor that into your decision making.
- What’s the repayment policy? When you opt for a fixed rate home equity loan, you will have a fixed monthly payment for the term of that loan. Simple. You’ll always know what your payment will be and it will never change, which is a huge plus when it comes to budgeting. On the other hand, if you decide to take a HELOC, your interest rate may fluctuate and your payments will follow suit based on the current interest rate and also the amount you borrow over time. Like everything, there are pros and cons to both. When you speak to lenders, be sure to get the repayment policy in writing for comparison to see which works best for you.
- What are the fees involved with a home equity loan? Fees associated with a home equity loan may seem endless. An application fee, closing costs, and other fees can often cost thousands of dollars. Some fees may be set in stone while others may be negotiable. It’s always best to shop around to see which lender not only offers the best rate, but also the lowest fees. A low rate is great, but if the closing costs are triple, you’ll just be swapping debt. Ask for a good faith estimate from each lender for comparative purposes. This estimate will show all of your total expected fees. You may see fees including points, title search, title insurance, origination fee, documentation preparation, administrative fee, underwriting fee, and even a prepayment penalty. Many of these excess fees are appropriately referred to as “junk fees,” excess charges that a lender imposes at closing. These “junk fees” often take the borrower by surprise, which why you need to be prepared and do your research on multiple lenders. Did we mention we have a NO FEE** Home Equity Loan?! Click here to find out more!
- Should you be considering other types of loans? Once you’ve tackled the potential fees, you may also want to compare other types of loans, such as a secured personal loan or an unsecured loan. The interest rates may be a bit higher, but you may find the fees to be significantly less. Plus, there’s no risk of losing your home. You very well may discover an option that’s better suited for you to borrow money than a home equity loan or HELOC. In the long run, you need to determine which loan makes the most financial sense for your financial situation.
- Credit score really does matter! The best home equity loan rates advertised by lenders are for those borrowers with the highest credit scores. Before you sign, be certain you are getting that low rate you saw advertised. If your credit score is not good, your local credit union representative may be able to give you tips to improve your credit score in advance of applying for a loan. Just another way credit unions live their motto of “people helping people.”
- Does your lender require insurance coverage? Insurance coverage may or may not be a bad idea when borrowing against the equity in your home. You may have to increase your homeowner’s insurance if you are leveraging the equity in your home, but you don’t necessarily need things like credit life, disability or unemployment insurance. If you purchase any type of insurance coverage through your lender, it will make for higher monthly payments. Can your budget handle that? If you decide you need or would like insurance, shop around to get the best deal.
Finally, if you do decide to move forward with applying for a home equity loan, request copies of any forms or contracts you’ll be signing at the closing in advance so you can read them thoroughly beforehand. Ask the lender specifically if there were any changes to the good faith estimate provided. If you find any discrepancies or don’t understand something, ask questions.