A home equity line of credit can be a valuable financial tool; however, this type of home equity loan carries significantly more risk than a second mortgage. Here is what you need to know to minimize the risks for your home equity loan and avoid common mistakes.
A home equity line of credit works like a credit card. You can borrow against the equity in your home up to the limit approved by the lender. Your lender will provide you a debit card or checks to access your equity; your monthly payments are based on the amount you borrow. Home equity lines of credit come with variable interest rates so your mortgage lender will adjust your interest rate and monthly payment amount at regular intervals specified in your loan contract.
When you apply for a home equity line of credit you will be charged many of the same expenses you paid when you took out your primary mortgage. Application fees, lender fees, appraisals, and closing costs will all have to be paid to close on your home equity loan.
The risks associated with a home equity lines of credit come from the variable interest rate that will change your monthly payment amount and the ease of access to your equity. Because you have a debit card you might be tempted to spend more money than you originally intended; if you often max out your credit cards you could find yourself with a maxed out equity line of credit when you only intended to borrow a few thousand dollars. Remember that your home equity line of credit is secured by your home just as your primary mortgage is; if you fall behind on the payments the lender could take your home.
To learn more about home equity loans and how to avoid common homeowner mistakes, register for a free mortgage guidebook using the links below.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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