This checklist does not tell you the procedure to get home equity loan, It is designed to help you to protect yourself when you’re getting a home equity credit line. The purpose behind writing this article is to educate people out there about common pitfalls of home equity credit lines, so that they can protect themselves, when they take this important decision of their life.
1. Check your credit line for a pre-payment penalty clause.
If you are getting a “NO FEE” credit line, chances are it has a pre-payment penalty clause. This can be very important plus expensive, especially if you are planning to refinance or sell your home in the next two to five years.
2. Never apply for too large a credit line.
If you get too large a credit line, you can be turned down for other loans. Some lenders calculate your credit line payments based on the available credit, even when your credit line has a zero balance. Having a large credit line indicates a large potential payment, which makes it difficult to qualify for loans.
3. Understand the difference between an equity loan and a credit line.
An equity loan is closed–i.e., you get all your money up front, then make payments on that fixed loan amount until the loan is paid. An equity credit line is open–i.e., you can get an initial advance against the line, then reuse the line as often as you want during the period the line is open. Most credit lines are accessed through a checkbook or a credit card. Credit line payments are based upon the outstanding balance.
- Use an equity loan when you need all the money up front–e.g. home improvements or debt consolidation.
- Use a credit line if you have an ongoing need for money or need the money for a future event–e.g., you need to pay for your child’s college tuition in three years.
4. Check life cap on your equity line.
Many credit lines have life caps of 18%. Be prepared to make high interest payments if rates move upwards.
5. Shop around.
Many consumers get their credit line from the bank with which they have their checking account. Shop around before deciding to use your bank.