Summer is on the way, and for many of us, that means home improvement. We probably won’t be borrowing against the equity in our home for any projects, but we are building planting boxes and planning to have some concrete poured to widen our driveway. Lots of folks, though, use home equity to finance projects around the house. With some lenders starting to loosen up a bit, and with home values (in some markets) stabilizing, the home equity loan is starting to make a comeback.
While it is nice that in many cases the interest you pay is tax deductible, and it is nice that you end up with a lower rate than many other types of financing, there are some pitfalls associated with home equity loans. Here are 6 things to remember as you borrow against your house:
- Comparison shop: Don’t just go to the bank that has your home mortgage loan. Fees and rates can vary. Do an apples to apples comparison with a few different lenders, and choose which will give you the best deal.
- Understand the difference between a HELOC and a home equity loan: There are different option for home equity financing. A HELOC is a line of credit, and is revolving, so you can keep borrowing as you pay it down, without having to apply for a new loan. It also often comes with a variable rate. A home equity loan, though, is offered in a lump sum, but generally comes with a fixed rate.
- Make sure you can afford the monthly payments: Double check to ensure that you can afford the monthly payments. If you have a variable interest rate, you will need to make sure that you allow for increased rates and payments.
- Read the fine print: Be sure to read the contract through carefully, looking at the terms. Balloon payments and prepayment penalties are still sometimes sneaked into contracts. Make sure you understand these pitfalls. You can have a knowledgeable attorney review the contract if you are not comfortable.
- Use your home equity loan for major costs: Because you will have to pay origination fees, closing costs and other expenses, a home equity loan or HELOC is best used for major home improvement costs. It is usually a bad idea to use home equity financing for travel or for credit card repayment, since you could lose your house if you fall behind on your payments.
- Cancel your home equity financing if you change your mind: Under Federal law, you have three days to consider your home equity loan decision. If you sleep on it, and decide it’s not going to work out after all, you can cancel within 72 hours.