What to do when Applying for a Home Equity Loan

A home equity loan is form of revolving credit in which your home serves as collateral. They are used by many homeowners to cover larger expenses such as education costs, home improvement costs or medical bills. Home equity loans can be helpful for larger expenses but be careful of only borrowing what you can reasonably afford to repay.  If you cannot repay the principal and interest when required you could possibly lose your home.

Just as when applying for other types of financing, your lender will determine your ability to repay the loan by looking at your income, debts, other financial obligations and your credit history. They make sure that your income is adequate to make the payments and that you do not have too many other financial obligations already.

When researching home equity loans one thing to consider is if you want a fixed rate loan or variable rate loan. With a fixed rate loan you will have the same interest rate during the entire life of the loan. With a variable rate loan your interest rates will change as other rates change. If you choose a variable rate loan, ask about the index used, frequency of rate adjustments and interest rate cap and floor. Other things to keep in mind are the length of the plan, repayment period and repayment terms. 

It is important to consider the extra costs associated with the home equity loan such as the appraisal fee, application fee, upfront charges and closing costs.  When considering the amount of the payment you can afford each month, these extra charges also need to be considered. Lenders require you to get an independent appraisal of the property for any kind of mortgage transaction.  The amount of the loan you are going to be eligible for is partly based on the value of the appraisal. Lenders have different guidelines to determine the amount of the home equity loan based on a percentage of the appraised amount, in many cases it is 75 percent of the appraised value.

Even though a home equity loan can be an useful tool, it is also important to consider the consequences if something happens and you can’t make the payments. With some types of credit that are unsecured such as credit cards there is noting as collateral. But with a home equity loan, your home is put up as collateral and you risk losing it if you cannot repay the loan.