There are times when a home equity loan is the perfect financial solution. There are also times when there are better options available to you.
Your goal is to learn as much as possible about this type of loan, thus allowing you to make an informed and confident decision.
One of the best things you can do is answer any and every question on your mind. Here’s a good place to start:
1. Are you comfortable putting up your home as collateral?
This is the first question you must answer, as it could have a big impact on your future should you be unable to pay your loan at some point.
A home equity loan is secured by your property. If you have any concerns about staying current, it’s best to take a step back and reassess your situation.
2. Are you familiar with the terms and conditions?
You want to know what you’re signing for. Home equity loans vary from bank to bank and borrower to borrower, so make sure you know exactly what you’re getting.
From the term of the loan to the interest rate, leave no stone unturned. This will ensure your confidence as you sign on the dotted line.
3. How do you plan on using the money?
It’s one thing to quality for a home equity loan. It’s another thing entirely to have a clear idea of how you’ll use the money. Without this, you may find yourself borrowing for no reason at all.
Some of the better ways to use the funds from a home equity loan include:
- Home improvement or repair project
- Debt consolidation
- Medical bills
- Large expense, such as paying for a child’s wedding
4. What are the closing costs?
You may find a lender that doesn’t charge closing costs — such as during a promotion — but you shouldn’t hang your hat on that. There’s a good chance you’ll have to pay closing costs associated with your loan.
Ranging from two to five percent of the loan amount, this is something to think about before deciding in favor of a home equity loan.
5. Are you comfortable with the impact of a home equity loan on your budget?
It’s easy to focus so much attention on the benefits of a home equity loan that you overlook the impact on your budget.
Can you comfortably make the monthly payment? How long will the loan impact your budget? What will you do if you run into financial difficulties?
Once you answer these questions — among any others that you’ve been thinking about — you can decide if it makes sense to apply for a home equity loan.
Just because you begin the search doesn’t mean you have to secure a loan. There’s nothing wrong with collecting the necessary information, mulling over the pros and cons, and then making a decision.