3 Common Mistakes Home Owners Make when Getting a Home Equity Loan

Many homeowners getting home equity loan information from lenders end up making mistakes along the way. Home equity loans can be a great tool to use when you use them correctly. However, there are several common mistakes that home owners make when getting this type of loan. Here are a few common mistakes to avoid. 

1. Not Shopping Around

Not shopping around for your home equity loan is going to be one of the biggest mistakes that you could make. When you need a home equity loan, you should look online as well as in your local market. If you just walk into your favorite local bank and agree to a home equity loan, you have no idea how much you should be paying for it. The interest rate might be higher as well as the closing costs. By shopping around, you can get estimates and use them to negotiate with. Despite what many think, closing costs can be negotiable. Therefore, you should shop around with a few different lenders before making a decision. 

2. Not Reading the Fine Print

Another common mistake that home owners make is that they rush through the loan process and do not read the fine print. For example, many of us receive promotional materials from lenders in the mail frequently. These promotional materials have offers for home equity loans that make unbelievable claims. It may promise you a large home equity loan for a very low interest rate. If all you do is focus on the rate that they quote you on the promotional, you could be in for some trouble. Many of these companies use promotional rates for their home equity products. Therefore, you might only be paying 2% interest for the first six months of the loan. After that it jumps up to 9%. However, all you saw was the 2% figure on the promotional material. Be aware of what kind of loan you are signing and if there is any promotional material. 

3. Taking the Loan for Inappropriate Reasons

One big mistake that people make is to take out a home equity loan for inappropriate reasons. We are inundated with home equity loan offers and before long we start mentally spending our equity. Then we start shopping for a home equity loan without really thinking about the consequences first. 

Many people will take out a home equity loan to purchase a vacation or to buy a home theater system. Uses that will not provide you with some type of long term benefit are usually not in your best interests. If you take out a home equity loan to consolidate debt, then that is a legitimate use of the funds. If you take out the money to upgrade or add on to your property, then this is another potentially good reason to borrow the equity. Just keep in mind that your equity was very difficult to accumulate. Therefore, you should not spend it frivolously.