What to Watch Out For in Home Equity Loans

Most people don’t realize that their homes can actually be a means to financial gain. There is equity in your home and you can use this equity to take the cash value from your home when you need it. Simply put, it’s just like borrowing money from your home, which you can repay over an agreed period of time, and at a certain interest rate.

Especially in economic crisis, a homeowner can make use of home equity loans to borrow a huge amount of money. This is often only used for major financial needs such as home improvements, medical bills, and college education, and not for everyday expenditures.

But here’s the thing to watch out for. In a home equity loan, you are posting your home as collateral, and in the event that you default on the debt, the lender could take your home away. And a home is not something you would want to lose.

And because you are putting your house on the line, there are some precautions you have to take to ensure that you get the best out of home equity loans. Some lenders can trick you into paying more than you actually need to, so be aware of the tactics that they often use.

Before signing the contract, ask about hidden fees. Most lenders do not tell you about these third party fees beforehand, and without you even knowing it, you could end up paying thousands of dollars on hidden charges. Such charges could include insurance premiums and appraisal costs, among others. Some lenders can even be so tricky by charging you these fees a year after you have closed the loan. That’s why it’s wise to know all the hidden costs before you make a decision.

Ask your lender about prepayment penalties. Prepayment penalties occur whenever you pay more than the monthly payment. When you pay more every month, you can repay your debt even before your term is up. By getting out of a term early on, you will be paying lower interest charges, and this is not something that makes a lender happy. That is why some lenders charge you prepayment penalties to avoid this from happening. And we’re talking about penalties worth three months of payment, or 10 percent of the principal. This is not cheap. Especially in high-interest loans, you should have the right to get out of it quickly.

Also watch out for home equity loans that entice you with really low payments. The reason why it’s that low is that you could be paying only the interest of the loan every month. This means that the principal or the entire amount that you borrowed has to be paid at the end of the loan term in a hefty lump sum. This is also called balloon payment.

That’s why before you sign contracts, always know what you’re putting your name on. Read all documents, pay attention to the fine print, badger the lender about hidden fees if you have to, and know your rights. Remember, it’s your home on the line.

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