Home equity line of credit – Top 5 points to consider before applying

A home equity line of credit is one of several options that you could look into if you are in need of credit. However, before making a decision, you should consider very carefully the cost of a home equity line against the benefits. You will need to shop around for credit terms that will best meet your needs without putting yourself into financial risks.

Before we get into the top 5 points you should consider before applying for a home equity line of credit, you should at least know what a home equity line of credit is and why you should consider one.

What is a Home Equity Line of Credit?

A home equity line of credit is a type of revolving credit in which your home will be put up as collateral. Equity is simply the amount of ownership value you as the homeowner has in your property versus the amount that is mortgaged. Let’s say your home is appraised for $345,000 and you owe $300,000 to a mortgage company, the equity in your home is $45,000, which would be the maximum amount of money that you can borrow on your loan.

Why Consider a Home Equity Line of Credit?

Because a home is one of the most valuable asset a consumer may have, many homeowners find this type of borrowing to be the most beneficial especially for major items such as, home improvements, medical expenses or education, and choose not to use a home equity credit line for day-to-day expenses.

Financial Risk – You will need to consider the risk involved if you fail to repay the amount you have borrowed, plus principle and interest. You will need to take into consideration your ability to repay the loan by looking at your income, debt and other financial obligations. Because failure to repay your loan could mean the loss of your home.

Consider the APR – Keep in mind when shopping around that the annual percentage rate and the cost of establishing the plan are based on the interest rate alone and will not reflect closing costs, fees and other charges. This is very important when comparing costs, as well as the APRs, among different lenders.
Variable vs. Fixed Interest Rates – A variable or adjustable rate mortgage varies over time. Adjustable rate offer lower rates but only for a limited time. Adjustable rates are more risky because you can end up getting a much higher rate after the introductory period has ended. A fixed-rate mortgage has a set rate of interest that does not change regardless of what the going interest rate is. It stays the same throughout the life of the loan.
Additional costs – Many of the cost of obtaining a home equity line of credit needs to be considered, such as:

Appraisal fees
Non- refundable application fee
Closing costs
Attorneys fees
Title search fee.
Mortgage preparation and filing fees
Property and title insurance
Taxes

Repayment – Whether your payment arrangements during the life of the loan is to pay some, a little or none of the principal amount of the loan, when the plan ends, you may have to pay the entire balance owed. So you must be prepared to make a balloon payment by refinancing with the lender or by obtaining a loan from another lender. Not making the balloon payment all at once could cost you your home.

There are many advantages of borrowing with a home equity loan, but there are also great risks involved if you fail to keep up your end of the deal. So consider the five points listed above before applying or you could end up losing dream home.

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