Financial Literacy 2007 - Home equity
A cartoon woman on a ladder putting a large coin into the roof of a yellow and blue house with and blue and yellow background
home equity
4 steps to take before borrowing

If you think you're ready to tap some of the equity in your home, do your homework first. The time you spend now could save you heartache (and plenty of dough) in the future. Take these four steps before signing on the dotted line:

Homework assignment
  1. Consult your financial advisers.
  2. Comparison shop.
  3. Understand the terms.
  4. Know your rights.

1. Consult your financial advisers.

Financial advisers know which questions to ask to understand your complete financial picture, including events on the horizon. Starting here can save both time and money while making the borrowing process less threatening. Any major financial decision should be weighed with consideration to its tax impact. Speaking with a tax professional can guide you to your smartest borrowing decision.

2. Comparison shop.

Shopping is an incredibly important but often overlooked step. At the very least, start with your primary lender. One easy way to find the best deal is to use the Bankrate home equity loan rate tables to find rates specific to your area. One bankruptcy researcher draws a parallel between consumer willingness to "run around to Kmart or Target to save 50 cents," while the stakes of taking out a home equity loan are much higher. With these numbers, rates even 0.1 percent to 0.6 percent higher than the prime rate add up to thousands of dollars worth of additional interest payments. Be sure to shop.

This audio clip explains what lenders look for.

3. Understand the terms.

Home equity loan terms may be unfamiliar to you. What you don't know could cost you your home. Most home equity lines of credit, known as HELOCs, are variable rate loans. Generally, a HELOC starts with a low teaser rate, then increases after a set introductory period. Find out the floor and ceiling rates. The initial rate is almost always at floor, or the lowest allowable rate, and the only way to go is up. Make sure you do the math and determine whether you will be able to afford the rate increases.

Use the glossary of the most commonly used home equity terms to help you understand all the details of the deals offered.

4. Know your rights.

The Federal Reserve says you should receive information in writing about each mortgage or home equity loan program you are interested in before you pay any fees. Be sure to read all the loan details and ask the lender or broker to clarify index rates; margins; caps; other ARM features, such as negative amortization; or anything else you don't understand. After applying for a loan, you will receive detailed loan information from the lender, including the APR, a payment schedule and whether the loan has a prepayment penalty. A provision of the Truth in Lending Act gives you the right to cancel certain real estate loans within three business days without penalty. It is called the right of rescission. In home equity loans, you can rescind only when using your principal residence -- not a vacation or second home -- as collateral.

Has home equity funded your dreams or turned into a nightmare? Share your story.

« Back to the Table of Contents

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
HOME EQUITY STRATEGIES & ADVICE NEWSLETTER

Advice for homeowners looking for options to use their home’s equity wisely. Delivered monthly.

advertisement

Ask Dr. Don

Too soon for home equity loan?

Dear Dr. Don, I was wondering if it is possible to take out a second mortgage on my house to pay for my student loans. I've owned my house for about one year now, but I don't have much equity in the home. My student loan... Read more

Partner Center
advertisement

Connect with us