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.

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.

Mortgage Bankers Association

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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