A home equity line of credit or HELOC allows you to tap into the equity in your home. With this, you can pay for home renovations, consolidate debt, or continue your education — and that’s just a few examples.

Even if you know you’ll qualify for a HELOC, it doesn’t necessarily mean you should head down this path. There’s a lot you need to do, from comparing the pros and cons to assessing other options that are available to you.

Here are five questions you should ask before you apply for a HELOC and eventually sign on the dotted line.

1. What is the interest rate? Is it fixed or variable?

It doesn’t matter if you’re applying for a line of credit, loan, or credit card, you should understand the interest rate attached to the product you choose. Also, find out if it’s fixed or variable as this will impact your payment in the future. 

2. Is there a minimum draw requirement?

This varies from state to state and lender to lender. If there’s a minimum draw requirement, be sure that you’re comfortable with it before you proceed. 

3. What are the closing costs?

There are a variety of closing costs typically associated with a home equity line of credit. These include but are not always limited to:

• Application fees
• Underwriting fees
• Processing fees
• Appraisal fees
• Recording fees
• Escrow and title fees
• Credit history and credit report check

Closing costs vary by lender, so ask about this upfront as you’re comparing your options. 

4. Is there an annual fee? Cancellation fee? Any other fees?

Most HELOCs have an annual fee, as well as a cancellation fee. There may be other types associated with your account, such as late payment fees. Ask for a fee schedule before you get too far into the process. 

5. How much money do you need to borrow?

Many people make the mistake of thinking that “more is always better” when applying for a home equity line of credit. Rather than take this approach, make a decision based on the finer details of your needs. 

For example, if you need $20k to pay for a home renovation, don’t borrow $30k. This could lead you to recklessly spend $10k that you also need to repay. 

Final thoughts

Now that you’ve answered these questions, you can decide if a home equity line of credit is right for you at the present time. If it is, consult with three to five lenders to determine what’s available to someone in your position and how to proceed.

Do you have any experience with a home equity line of credit? Would you add any other questions to the list of five above?