Home Equity Loans: The Ins And Outs


What’s a good way to deal with the equity that you’ve accumulated in your home? Here’s an analogy. Imagine that you have a savings bond sitting in a safety deposit box gathering dust. Your 25th high school reunion is approaching, so you cash it in and head to the cosmetic surgeon’s office. A nip and tuck later, and your former classmates vote you “Most Improved.” Now that’s a good investment! The equity sitting in your home is just like that savings bond – sitting around accumulating dust. A home equity loan or line of credit will allow you to access it. Reinvest the funds in whatever you’d like, from self-improvements, like plastic surgery or going back to school, to home improvements, like a new master bath or office addition. Just be certain you understand the ins and outs of these types of loans before you begin.

SEE ALSO: 5 Disadvantages Of Home Equity Loans

Numbers Count In Home Equity Loans

You obviously want a home equity loan with the best rate – your high school yearbook doesn’t list you as “biggest brain” for nothing. Unfortunately, lenders couldn’t care less about your IQ score. What they do care about is your credit score and the current value of your home. You can’t do much to influence the real estate market, but you can control your credit rating. Keep your number high by paying bills on time, every time. Pay down the balances on your plastic, and check your credit report at least twice a year to make sure everything is accurate.

If At First You Don’t Succeed

Remember when you had to ask three people out to secure one date to the dance? You might have to do the same thing to secure a home equity loan, so don’t give up after the first try. Just because one lender doesn’t think you’re hot stuff doesn’t mean the next bank you approach won’t jump at the chance to dance with you on a loan. If you find several willing partners, compare their offers, and choose the best one. One piece of advice – if it sounds too good to be true, it just might be.

Read The Fine Print. Better Yet, Read All The Print

There are two types of home equity loans – a traditional one, and a home equity line of credit (HELOC). With the former, you receive the funds as a one-time payment at a fixed interest rate. With the latter, you can cash in equity as you need it with a line of credit, and the interest rate is generally variable. Be wary of home equity lenders who want to tack on unnecessary fees, or stick you with a product with pre-payment penalties. Whether you opt for a home equity loan or HELOC, don’t sign on the dotted line until you understand exactly what you’re in for. Think of it as meeting her parents before the first date. If dad answers the door with shotgun in hand, it’s time to run for the hills. If he offers you a plate of cookies, stick around for a while. And if you find a lender who will allow you to convert the variable rate on a home equity line of credit to a fixed rate, consider marrying him.

SEE ALSO: Should You Use Your HELOC as an Emergency Fund?

Date of original publication:
Updated on: November 10, 2015

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