Planning to take out a home equity loan? Dos and Don’ts

Perhaps you want to finance large expenses like your children’s college education, you are suddenly faced with large and unexpected medical bills, or you would like to carry out major home improvements or repairs. A great way to get the funds is to opt for a home equity loan. Depending on your credit history and the loan-to-value ratio of your property, you may be able to get a safe and convenient loan against your home.

What are Home Equity Loans?

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

Home equity loans have made a comeback recently after many years of scarcity 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 can be easy to obtain if you meet the eligibility criteria and make financial sense if you have equity, but there are several inherent risks:

• Variable or floating interest rates: they could always increase in the future.

• Too easy to spend: You could end up with “buyer’s remorse” after splurging on a bunch of unnecessary things.

• Payment in full: If you are not financially savvy and do not hold tight reins, you could run into problems at the end of the loan period.

• Loss of property: defaults result in foreclosure and you could lose your own home.

That’s why exploding your home’s equity can be extremely risky if you accept a home equity loan without a full understanding of the process and its repercussions.

Rules

Protect yourself and your family by educating yourself thoroughly before embarking on a home equity loan. It could be a disaster to wait if you are not aware of the implications and repercussions.

Here are some tips to keep in mind:

Behind

• Remember that it is still a form of mortgage

• Keep meticulous records of all refunds and fees, including billing statements, bank records, canceled checks, and so on. so you can challenge inaccuracies with strong evidence.

• Read the loan agreement very carefully.

• Never hire unlicensed contractors to work on your home.

• Use the loan amount to make genuine improvements to your home or for whatever specific purpose you borrowed for.

• The loan amount can be used to overcome unexpected events / crises if you do not have an emergency fund

• Can be used to build a retirement savings fund.

• Check to see if there are tax benefits or deductibles available.

Not to do

• It’s tempting, but never use your home equity loan to spend money on a bigger TV, boats, cars, cruises, vacations, and so on.

• If you plan 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 falls, you could be caught in a massive redemption situation

• Don’t be pressured by heavy marketing tactics – educate yourself and inform yourself

• Consult your family before applying for a loan.

• Never sign documents that have blank spaces or that you have not fully read and understood

• If necessary, get documents examined by an expert

• Evaluate your ability to pay and judge whether you can really afford it.

Today, interest rates are at a record low and the economy is improving. Many homeowners are considering getting a home equity loan, and in fact, it’s a great option if you have the credit rating and eligibility. Also, if you also fully evaluated the risks and benefits, you approached a reputable, well-established, and trustworthy institution or organization and did some good research.