Home-Equity Do's and Don'ts

By Richard Barrington
LoanPage.com Columnist

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Mortgage activity slowed in April 2007, most likely because of tighter lending practices in the face of subprime mortgage defaults. Even so, a home equity loan is still a valid option for certain borrowing needs, especially since home equity loan rates can be much cheaper than many other forms of consumer debt.

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The negative headlines concerning subprime defaults should not deter hopeful borrowers, but instead it should serve as a reminder to follow some common-sense do's and don'ts.

Home Equity Do List

The following are some of the things you should do when shopping for a loan:
  • » Compare lenders to get the most competitive interest rate.
  • » Understand closing costs and other key loan terms.
  • » Consider whether a home equity line of credit might be more suited to your needs — this can help you avoid paying closing costs on multiple loans.
  • » Make sure the monthly payment fits your budget before you take out the loan — and know if and how much your home equity loan rate is subject to change.

Home Equity Don't List

Like any type of mortgage, a home-equity loan is secured by owning a home. Before you put that ownership on the line, consider these common traps:
  • » Don't borrow long term for short-term purchases.
  • » Don't take out nickel-and-dime loans — closing costs will represent a higher percentage of smaller loans.
  • » Don't use a teaser rate to get more loan than you can afford. Think past the initial payments — what can you afford to repay each month after the teaser rate expires?
One final don't to consider: Don't let the negative headlines scare you off. Home equity loans are still valid financial tools as long as you educate yourself and use them correctly.

Sources
Mortgage Bankers Association
http://www.psecu.com

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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