A home equity loan allows you to borrow money against the equity that you have in your home.
As a secured loan (your home is the collateral), you can expect a competitive interest rate. Furthermore, since you’re putting up collateral, there’s a better chance of qualifying.
While you could turn to just any bank for a home equity loan, you’re best off following a simple five step process to ensure yourself of making the right decision.
1. Be Sure it’s Right for You
Before you do anything, make sure a home equity loan is the best option for you.
There are other options to consider, such as a home equity line of credit (HELOC), personal loan, or credit card.
As you learn more about the finer details of a home equity loan, you can decide if it makes sense for you at the present time. Don’t force it if the time isn’t right.
2. Shop Around
Don’t assume that the first lender you speak with will be able to meet your every need. By shopping around, you’ll get a clear view of what is and isn’t available.
As a general rule of thumb, contact at least three lenders to learn more. One of these should be a bank you already have a relationship with, while the rest are based on your research.
3. Ask Questions
There’s no such thing as a stupid question. When it comes to your finances, you need to ask questions to ensure that you’re making the right decision. If you simply hope that you’re right about something, it could cost you in the end.
4. Focus on the Interest Rate and Term
There’s a lot to think about when shopping for a home equity loan, but the interest rate and term should be at the top of your list.
First off, the lower the rate the smaller your monthly payment. This also impacts how much money you pay back over the life of your loan.
In regards to the term, consider all your options. A longer term results in a lower monthly payment, but you’ll have this weighing on you over an extended period of time.
5. Know How You’ll Use it
A home equity loan sounds like a great idea, but don’t sign on the dotted line unless you have a clear understanding of how you’ll use the money.
Are you taking on a home renovation project? Are you planning a once in a lifetime trip? Are you paying for your child’s wedding?
There are many ways to use the funds from a home equity loan. As long as you have a plan in place, you can confidently take action.
So, there you have it. Applying for and securing a home equity loan isn’t as difficult as many people make it out to be.
When you take these five steps, you’ll end up in a good place. You can then decide if a home equity loan suits your requirements, or if you should consider another financial product this time around.