Home Equity Loan Mistakes to Avoid

In today’s high inflation and challenging economic climate, you may be looking for some help covering expenses.

If you own a home, get one Home equity loan Might be an option to explore. These can be Especially helpful If you need Cover home improvementsBecause they can qualify you for a valuable write-off come tax season.

what are you thinking Taking out a home equity loan? Then it helps to know some costly mistakes to avoid.

Start by exploring your home equity loan options here to see if it makes sense for you.

Home Equity Loan Mistakes to Avoid

Here are four mistakes to avoid when using your home equity.

Borrow more than you need

Before you take out a home equity loan, it’s important to know how much money you need and will actually use. For one, taking too much time can mean higher monthly payments, which can lead to financial problems if you lose your job or see less time off.

“Borrowing more than you need increases your monthly payment and puts extra strain on your budget, potentially making it more difficult to meet your financial obligations,” says Andrew Latham, a certified financial planner and editor of Super Money. “Always borrow what you need to reduce financial risk and ensure you can comfortably repay the loan.”

Taking on too much of a home equity loan can increase your long-term interest costs. (Unlike home equity lines of credit or HELOCsHome equity loans require you to pay interest on the entire amount borrowed — not just the portion of the funds used).

Apply with bad credit

You don’t necessarily need a perfect credit score to get a home equity loan, but applying for one if your score is low is generally not recommended. Not only will this make it harder to qualify for a loan, but you’ll likely get a higher interest rate if you do.

“Applying for a home equity loan with bad credit can result in higher interest rates and less favorable terms,” ​​says Latham. “It’s a good idea to improve your credit score before applying for a home equity loan to secure better terms and lower interest rates.”

per Improve your score, pay off your credit card balances, pay your bills automatically, and dispute any errors you find on your credit report. You can also ask to increase your credit card limit. This lowers your credit utilization rate — how much of the limit you’re actually using — which can help boost your score.

Don’t shop around for your loan

Anytime you get a loan, credit card, or other financial product you should shop around, as lenders offer different rates, terms, and fees.

“A common mistake borrowers make is not shopping around for the best rates and terms,” ​​says Latham. “Comparing different lenders can save you thousands of dollars over the life of the loan.”

Shopping around is especially important if you have a low credit score, eg Home Equity Loan Requirements Can vary quite a bit from one lender to the next. Start shopping for lenders here or through the table below.

Not understanding the risk

Home equity loans come with some major risks, so it’s important to understand them before taking them out.

First, they are a second mortgage – a loan alongside your first mortgage loan. This means once you’re approved, you’ll have not one but two monthly mortgage payments. This can be financially stressful and can hurt your credit if you fail to make your payments.

More importantly, it can also put your home in harm’s way. As Susan Waite, vice president of lending at Point Breeze Credit Union, explains, “Home equity loans are secured by your home, so if you default, you can put your home at risk of foreclosure.”

Home equity loan options

HELOCs can often be a better option Home equity loans, because they work like credit cards. You can borrow what you need, pay it back and borrow more later. You pay interest only on what you use.

Cash-out refinancing Another option for homeowners. With this strategy, you replace your current mortgage loan with a larger loan, repaying the difference in cash. Then you can use those funds as you wish

Finally, there is also the home equity-sharing option. This is when you receive a lump sum in exchange for a share in the future sale of your home. These require no monthly payments, although they can eat into your sales revenue if you’re not careful.

If you think a home equity loan is your best option, get started now by checking rates and eligibility here.