1. Types of home equity loans
There are two types of home equity loans: a home equity loan that is secured by the equity in your home and a home equity line of credit (HELOC). The first consists of borrowing a single lump sum with a fixed repayment agreement while the second allows for various sums within a period with a variable rate.
2. Know your credit score
Interest rate is dependent on your credit score. Those with the highest credit scores can expect to receive offers with the best rates.
3. Plan ahead
Take the time to review your credit report if you are considering taking out a home equity loan. Having this report gives you the opportunity to review any score-lowering mistakes and allows for you to correct them before applying for a home equity loan.
4. Shop around
A home equity is made up of rates, terms, and applicable fees. Any deal that you are offered will vary by lender and bank so give yourself the time to compare loan offers. Focusing solely on interest rates could turn you away from a loan that better fits your needs.
5. Good credit isn’t always the defining factor
It may be easier to qualify for a HELOC if your credit is poor. The terms of the HELOC may not be as lucrative but there may be more attractive options.
6. 3-day opt out
Federal law states that you can choose to cancel your home equity loan within three days as long as it is secured by your primary home.
7. Don’t default on your payments
If you somehow get to the point where you are unable to pay back your home equity loan, there is a huge possibility that your home could be at stake. If you are having issues repaying your loan, contact your lender immediately and explore your pay back options. Don’t be afraid to inquire about changing the loan’s terms, monthly payments, or even interest rate.
8. Payback expectations
In the event you sell your home, it will be expected that the amount borrowed against your home be paid off quickly. Keep in mind that you will not be able to close escrow since the home equity loan places a lien on the property as collateral.
9. Tax write off
Home equity debt, in most cases, can be deducted up to $100,000 for any interest paid on your home equity loan. Consult with a finance or tax professional to find out your options! You’ll not only be taking advantage of the low interest rate, but you’ll also be able to write off your interest payments as tax deductions.
10. Unexpected expenses
Most commonly, people choose to use their home equity to pay for unexpected and unplanned expenses. These expenses can include medical bills, starting a new family, college tuition, and large home repairs such as repairing or replacing a leaky roof.
Some use their home equity to purchase additional investment properties or to invest into business ventures.