A home-equity loan can be a good tool for savvy homeowners looking for a convenient way to borrow money. Many home-equity loans offer an attractive interest rate compared to those offered by credit cards and other types of loans, and borrowers can deduct the interest when they file taxes. But not all home-equity loans are alike. Getting a loan that offers competitive rates, fees and terms takes a little extra effort. Here are a few items to keep in mind when you start shopping for a home-equity loan.
Before you go on shopping for a loan, remember leveraging your home for cash is a big decision. Make sure you know the different types of home-equity loans as well as the factors that determine whether it's a sound financial decision. More specifically:
Take a Look at the Largest Costs. The single largest cost associated with most home-equity loans is interest. When comparing loans, keep in mind that the annual percentage rate (APR) is calculated differently on a traditional home-equity loan than on a home-equity line of credit - the first has a fixed interest rate and the second has a variable interest rate. The APR for a home-equity line of credit is calculated based on the loan's interest rate. The APR for a traditional home-equity loan generally includes the costs of initiating the loan. Because of this difference, a direct comparison between fixed-rate loans and variable-rate loans cannot be made.
Check out Hidden Fees. Interest is the largest single cost associated with most equity loans, but it is not the only expense borrower’s face. Taking out a home-equity loan or a home-equity line of credit imposes the same fees as a mortgage. If you choose a home-equity line of credit, you may be required to pay a transaction fee each time you make a withdrawal and an inactivity fee if you don't use your line of credit over a given period. When comparing fees of different loans keep in mind that some lenders will waive closing costs and other fees, so be sure to ask for a waiver.
Do your Shopping Smartly. Because you are using your home as collateral, it is particularly important that you consider carefully all elements of any home-equity loan prior to taking it. Borrowing against your house puts you at risk of foreclosure should you be unable to repay the debt, so make sure you understand what you're getting into and that you can afford to repay the loan before or when its term ends.