Friday, June 2, 2023

Planning to Take A Home Equity Loan? The Do’s and Don’ts Of It

Perhaps you want to finance big-ticket expenses such as your children’s college education, you are suddenly faced with large and unexpected medical bills, or you want to make major improvements or repairs to the home. A great way to come up with the money is to opt for a home equity loan. Depending on your credit history and the loan-to-value ratio of your property, you can avail a secure and convenient loan against your home.

What are home equity loans?

They are loans taken out using the equity or market value of the borrower’s home as collateral. Equity is calculated using the difference between the market-value and the outstanding mortgage balance.

Home equity loans have recently been making something of a comeback after several years in the market. For people with good credit-ratings, rates are lower than other forms of borrowing like personal/auto loans or credit cards.


Getting a home equity loan can be easy if you meet the eligibility criteria and have equity, but there are several inherent risks:

• Variable or floating interest rates – they can increase at any time in the future

• It’s too easy to spend – you can get “buyer’s remorse” after spending too much on unnecessary things

• Repayment in full – If you are not financially savvy and keep a tight rein, you may find yourself in trouble at the end of the loan tenure

• Loss of property – default can result in foreclosure and you can even lose your home

That’s why tapping into the value of your home can be extremely risky if you take a home equity loan without a full understanding of the process and its consequences.

DOS and don’ts

Protect yourself and your family by fully educating yourself before taking out a home equity loan. It can be a disaster in waiting if you are not aware of the implications and consequences.

Here are some pointers to keep in mind:

worth doing

• Remember that it is still a form of mortgage

• Keep careful records of all repayments and charges including billing statements, bank records, canceled checks etc. so that you can challenge inaccuracies with solid proof.

• Read the loan agreement very carefully

• Never hire unlicensed contractors to work on your home

• Use the loan amount to make physical improvements to your home or for whatever specific purpose you have taken the loan

• The loan amount can be used to meet unforeseen events/crisis if you do not have an emergency fund

• It can be used to build a retirement nest

• Check whether tax benefits or deductions are available

what not to do

• It’s tempting, but never use your home equity loan to pay for big TVs, boats, cars, cruises, vacations, etc.

• Avoid taking a home equity loan if you are planning to sell your home soon

• Don’t take an unnecessarily large loan – keep it realistic. You could be stuck in a massive repayment position if the market falls

• Don’t be pressured by heavy marketing tactics – educate and inform yourself

• Consult your family before taking loan

• Never sign documents that have blank spaces or that you have not read and understood thoroughly

• If necessary, get the documents verified by an expert

• Evaluate your paying capacity and decide if you can really afford it

Today, interest rates are at historic lows and the economy is on the upswing. Many property owners are considering taking a home equity loan and it is indeed a great option if you have the credit-rating and eligibility. Also if you have fully evaluated the risks and benefits, approach a reliable, well established and reputed institute or organization and have done your research well.

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