We hear a lot about home equity loans these days, but not many of us are fully aware as to what such a loan means and how you can benefit from it. Home equity loans are a type of loan in which the borrower uses his equity in his house as a guarantee for the loan.
The key advantages of these loans are that they often carry a lower interest rate than other loans and that you can take a loan of up to 90% of the value of your house. But you should be careful when taking a home equity loan as choosing the wrong lender or striking a deal on bad terms could be disastrous for your financial health. Here are a few tips that you should keep in mind.
First of all, you need to be very careful about the interest rates that you are being charged. This would be the biggest cost associated with such loans. Several factors play a role in determining the interest rate that you will be offered, most importantly your credit score. It would significantly reduce your lending cost if you manage a healthy credit score.
The timing of the loan would also determine the interest rate. Interest rates fluctuate in irregular cycles. If you feel that interest rates are at historically low levels, it could be a good time to take a home equity loan. The timing would also determine the amount of loan that the company would be ready to offer to you. If the housing market is in a good shape, the value of your house would be high and you would be able to get a larger loan.
While choosing a lender, you should conduct a comprehensive background check on the credentials of the company. You can go through the websites of different lenders and compare their offers to determine which one is the most competitive.
You should also compare the fees and charges that are involved in such transactions. Most lenders impose fees like closing costs, attorney fees, title search, document preparation, and insurance coverage. Seek clarifications with respect to terms and conditions of prepayment from the lender, as there could be a hefty prepayment charge as well.
Home equity loans can help you out when you need cash urgently, like if you lose your job, you are starting up a business, or if you are refurbishing your home. But you should never forget that if you are unable to pay the loan, you could end up losing your house.