Three Things To Look Out For When Applying For A Home Equity Loan

Posted on: 23 June 2017

A home equity loan is an excellent way to get extra cash for repairs, to start a business, or to take care of any financial needs you may have. To ensure you get the best deal, though, it's important to look at the various issues you may encounter in the process. Here are three things to watch out for when applying for a home equity loan.

Introductory vs. Long-Term Rates

To catch your eye and get your business, some banks will offer what seem like impossibly low rates for home equity loans. In reality, that low rate is likely an introductory offer that will increase after a certain period of time (e.g. 12 months). Unless you plan on paying back the money within the introductory period, the real rate you want to look at is the long-term interest you'll be charged because this is the rate you'll likely be paying for the majority of the loan period.

However, don't be afraid to take advantage of an introductory offer. Arrange your finances to pay off as much of the loan as possible to reduce the amount of principal that'll be charged at the higher rate when the introductory interest expires.

Balloon Payments

Another thing you want to watch for is a balloon payment that's due after a few years of paying on your home equity loan. Sometimes banks will offer loans with really low monthly payments. In exchange for those low payments, however, you have to pay the balance in one lump sum by a certain date. For instance, you may enjoy low payments for five years, but must pay off the loan completely by the end of the fifth year.

This is a good way to go if you know for certain you'll have the money available to make the balloon payment, because it'll free up money in the present you can use for other things. However, if you have even the slightest doubt about whether you can make that balloon payment, it's best to stick with a more traditional loan.

Prepayment Penalties

It may seem odd that a bank would penalize you for paying off your account early, but some home equity loans do charge prepayment penalties. That's because the bank calculates it'll make a certain amount of money from you via the interest charges. When you pay off the loan early, the company doesn't get the full amount of interest it was expecting and tries to make up the difference by charging a prepayment penalty.

Sometimes you can negotiate this clause out of the contract. If you can't and you don't want to worry about this issue, work with a bank that doesn't charge this fee.

To learn more about applying for home equity loans or for assistance finding the right one for you, contact a local bank.