Evaluating Home Equity Loans

Why not use the equity in your home to finance your dreams, remodel your home, pay college tuition, consolidate debt, or meet large medical bills? Put that value to work for you!

• how home equity loans work
• the benefits and possible risks in home equity loans
• how to evaluate and compare home equity loan options

• "Cold call" solicitations. The lender calls you first or comes to your door (you did not request information) offering to make you a home equity loan, often at "bargain" rates.
• "Credit doctor" ads or loan houses. Lenders that say "Poor credit? No problem!" and the like will at the very best offer you a high-rate, high-fee loan and at worst may be interested only in taking your home.
• High pressure sales techniques. If a lender pressures you to apply for more money than you need, to sign the contract immediately without evaluating or comparing its terms, to accept a payment you can't afford, or uses other high pressure tactics, say no and leave or hang up.
• Third party loan offers. A home repair contractor may say they can get you a home equity loan – always say no. If you need such a loan, do your homework and arrange for it yourself. Also thoroughly check out any contractor, particularly one who makes such offers, before hiring them. Sometimes, a family member may pressure you to take out a home equity loan to help them; they may even say they have the loan all arranged. Again if you are willing to put your home at risk to help, experts recommend that you evaluate the loan and be sure you can handle the payments if your relative doesn't pay because it's your home that's at stake.
• Loans with balloon payments. To tempt you to sign up, some home equity loans are set up so that you pay only a low payment every month (sometimes just interest on the amount borrowed) and then must pay a large amount – the balloon – at the end of the term when the loan comes due. Say no to this type loan.
• Prepayment penalties for paying the loan off early. Staying out of debt and paying off debt as soon as possible are good objectives. Loans set up so that you are charged a penalty for paying early are not in the consumer's best interest; it's objective is more profit for the lender. Avoid loans with these terms, too.
• Requests to sign papers quickly or to sign blank papers. Smart consumers always read every loan document carefully and never sign blank documents to be filled in later. If you discover that when it's time to sign the loan contract that the lender has added forms (such as agreements to buy credit life insurance) you've never seen, has left forms blank or requests that you sign a blank firm, refuse to sign. If the lender objects or says they'll have to refigure the loan terms, walk away from the loan.
• Different loan terms on the loan contract than you discussed. Some unscrupulous lenders will verbally agree to give you a loan for a reasonable APR and fees, for example, and then without telling you raise the amounts on the contract they ask you to sign. This is fraud. Don't do business with this lender and report them to your state consumer affairs or attorney general's office.

1. Evaluate your need and reasons for considering a home equity loan. If you are considering taking out a home equity loan because your budget is tight or you have emergency needs, you probably need financial counseling and debt management help. A home equity loan will just place you deeper in debt and will put your home at risk, too. If this is the case, check out the debt counseling services your credit union makes available to members.
   
   If your finances are sound and you are looking for the best low-cost loan for such big-ticket items as home remodeling or perhaps a vehicle purchase, a good low-rate, low-fee home equity loan may be a good choice. Before you begin exploring, look carefully at your budget to determine the maximum payment you can comfortably afford.
2. Compare two or three loan opportunities using a checklist to ask questions. Experts advise consumers to shop around for the best home equity loan terms. Contact your credit union and a couple of other lenders such as banks, savings and loans, or mortgage companies about home equity loans for which you qualify. Ask each potential lender to provide you specific information about such terms as the annual percentage rate (APR), points and fees, term of the loan, monthly payment, whether they use balloon payments or have a prepayment penalty, etc. To be sure you cover all the topics, use the checklist in "Shopping for a Home Equity Loan?" from the Federal Trade Commission.
3. Negotiate for the best terms. It's all right to let lenders know that you are shopping for a good deal and they have to compete for your business. Ask for full explanations of any terms or conditions that you don't understand fully.
4. Take a day or two to evaluate the loan offer. Most reputable lenders will put the terms of the loan offer in writing (some may also be willing to give you copies of the forms) so that you can take a day or two to think about the offer and to have your attorney or financial advisor look the offer over.
5. At loan closing, read all the papers carefully before signing. If any forms or terms are different from the terms to which you agreed or from what you expected or wanted, first ask why. If the lender's explanation is satisfactory, then renegotiate to get terms you like or walk away from the loan.
6. Remember that you have the right to cancel the loan within three days of signing. The Truth In Lending Act gives most borrowers of home equity loans the right to cancel the contract within three business days of signing. The borrower must inform the lender in writing within this time. Make sure you keep copies of your letter and the original documents you signed.