Mistakes to avoid in getting a home-equity line of credit / loan
- Not knowing if your loan has a pre-payment penalty. A pre-payment penalty will lower the fees on obtaining a credit line, but it will only affect some. If you are getting a “no fee” home equity loan, there will probably be a pre-payment penalty included in the loan. If you plan on staying at your home for awhile then there is nothing to worry about, but if you plan on selling or paying the loan off soon, then this is something you will want to avoid.
2. Not knowing the lifecap on your equity loan. Many credit lines have lifecaps of 18 percent. Be prepared to make payments at the highest potential rate.
3. Getting a credit line with too much credit available. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit, not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.
4. Not understanding the difference between an equity loan and an equity line. The difference is that an equity loan is closed. You get all your money up front and make fixed payments for a determined term until the loan is paid off. An equity line is open. You have the option to get advances for various amounts as you need. Most equity lines are accessed through a checkbook or a credit card. For both equity loans and lines, you can only be charged interest on the outstanding principal balance.
5. Not receiving a good faith estimate of closing costs. Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you’ll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE. Keep in mind that it is nearly impossible to give exact figures before closing because of the differences in each county and third party fees, but a GFE will give you a good idea of what kind of costs are involved.
6. Assuming that your home equity loan is fully tax deductible. Most borrowers can use their interest paid on home equity loans as write-offs but in some instances, your home-equity loan is NOT tax deductible. The best thing to do is check with your CPA or accountant regarding this matter.
7. Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future. Many mortgage companies look at the combined loan amounts when refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to be turned down.
8. Getting a home-equity loan from your local bank without shopping around. Many consumers get their equity line from the bank with which they have their checking account. You should always look around to see who can offer you the best program available to you before making a commitment.
9. Not considering a cash-out refinance instead of a home equity line of credit. Depending on your current situation, sometimes it might be more beneficial to do a cash-out refinance instead of a home-equity line of credit. You should discuss the two options with your loan officer to see which will work better for you.
10. Getting a home-equity loan to payoff credit cards when your spending is out of control. It is wise to get a home-equity loan to payoff your current credit carddebt, but you must stop spending and start paying your debt off. Be responsible and close out your credit card accounts.