Top 10 Mistakes in Acquiring a Home Equity Line of Credit

Do you plan to apply for a home equity line of credit?  If yes, check out the following mistakes and how you can avoid them:

1. Not being aware of the pre-payment penalty clause.

Lenders often require a pre-payment penalty fee if the buyer decides to complete the loan payments before the end of the repayment period.  However, some lenders may impose an unreasonably high prepayment penalty to discourage borrowers from completing their payments ahead of time.  Thus, before signing up your contract, make sure that you are clear about your lender’s conditions on early payment.

2. Obtaining a large credit line.

A very large credit line may tempt a borrower to take cash advances that are much more than what the situation calls for.

3. Thinking that a home equity loan is the same as a home equity credit line.

What is the difference between a home equity loan and a home equity line of credit?  Both types of loan are determined based upon the value of the borrower’s property.  However, with a home equity line of credit, the borrower can take out cash advances at anytime within the arranged period as long as it does not exceed the home’s value.  Meanwhile, a home equity loan is given as a lump sum payment.

4. Signing up for the first home equity creditor without comparing rates.

Some consumers may sign up for the first home loan offer they see.  However, even if the deal seems great, it is still advisable to consider all your possible options to be sure that you get the best deal.

5. Not asking for the good-faith estimate of the loan.

A lending company must hand over the borrower copy of a good-faith estimate of the loan costs days before the actual closing.

 6. Thinking that a home equity credit loan is tax deductible.

Check with the IRS about your tax privileges before applying for a home equity credit loan.

7. Applying for a home equity credit line with plans to refinance.

If you intend to refinance your first mortgage loan, do not apply for equity credit right away as some lending companies may decline your refinancing application if you already have a home equity credit line.

8. Obtaining a home equity credit line to pay credit card debts.

Putting your property on the line to pay off your credit card bills is a very dangerous action.  Remember, you can lose your home to your lender if you fail to pay back the loan.

9. Thinking that a credit card is more expensive than a home equity line of credit.

Some people may compare a home equity line of credit with a credit card, thinking that HELOC is always tax deductible.  However, putting your property on the line just to have a means to cover for monthly expenditures is a very risky move.

10. Not checking the lifecap.

If you have decided to apply for a home equity line of credit, make sure that there is a “cap” limit to the interest rate throughout your loan’s term.  This way, unexpected increases in your interest rate can be avoided.

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Elizabeth Roberts

Elizabeth Roberts

Liz Roberts and her team are continuously providing information to people who are ready to repair their credit and improve their credit score. Also NewHorizon.org team strives to empower the homebased and small business owners by bringing information that can help them to manage and grow their businesses. Let our 24+ years of business finance experience help you to get the financing you need! CONTACT US if need financing for your business.

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NHBS Inc © 2022

NewHorizon.org is an independent, advertising supported website. The owner of the site may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. NewHorizon.org has not reviewed all available credit card offers in the marketplace.

Privacy Policy Terms of Use

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