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HRCCU Blog

3 Smart Tips When Considering a Home Equity Loan

Posted by Adam Rossi on May 20, 2019 11:00:00 AM

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Taking out a home equity loan can be a promising prospect, particularly when you’re looking for an influx of money for more expensive endeavors - be it large home remodeling/renovations, paying off high-interest debts or finding money for college tuition. Despite the appeal, when it comes to taking out a second mortgage on your home it’s important to know the smartest and safest way to do so. Otherwise, you leave yourself open to a bad deal, an interest rate that’s unreasonable for you or a financial situation that can become untenable. Here are three tips to follow when you’re considering a home equity loan.

The Basics

Before we do a deep dive into home equity loan advice, we should talk a little bit about what a home equity loan actually is, because it can get confusing very quickly. A home equity loan is  usually a larger loan, acquired from a financial institution, that uses your home as the security basis of the loan. They become accessible when the market value of your home is greater than what you actually owe on your mortgage. Essentially you are borrowing against your home, using it as leverage to acquire a larger loan than you would typically have access to otherwise.

Home equity loans come in two variations:

Lump-Sum

This option is the more conventional loan, with the entirety of the loan coming to you up-front and a fixed interest rate on payback with fixed monthly payment plan.

HELOC loan

A HELOC loan is the other type of home equity loan, in which you are approved for the maximum amount possible from a financial institution, and then only actually borrow from the approved amount as needed. HELOC loans are much more flexible, but are also subject to fluctuating interest rates and money-line freezes, and so the HELOC tends to be the riskier option.

Now that we have a little background knowledge, let’s look at dos and don’ts.

The Dos and the Don’ts

Be Conscious Of Your Finances

If you’re looking into taking out a home equity loan, be very aware of the interest rates, loan length and your financial situation. You want to be in a  position where the loan payments won’t put you in difficult financial straits, so look carefully at your monthly income, savings and expenses before you make a decision on the type of second mortgage that works for you.

Don’t Borrow More than   Can Realistically Pay Back

Once you’ve decided you want to take out a home equity loan for a particular expense, stick by it. While it can be tempting to take out a loan for a larger amount if you qualify, it’s important to remember that you want to cover a particular expense and leave it at that. Large sums of money all at once can sound good, but in the long run putting more financial stress on yourself than is necessary will come back to bite you. Borrow only what you know you’ll need.

Use Low Interest Rates to Your Advantage

If you find yourself in a situation where you have multiple high-interest bills, it may make sense to use a home equity loan to pay off those debts. Considering the low interest rates that a home equity loan payment plan has when compared to many credit cards, using the loan to eliminate those debts is a good way to replace a high-interest monthly bill with a lower-interest one, which will save you money in the long run. Just be sure that you have the ability to pay the second mortgage off before you make that decision.

There’s no question that taking out a home equity loan requires a lot of thought and planning. However, If you do decide that a home equity loan is for you, HRCCU offers a number of different options that are focused on being both fair and flexible based on your financial situation and preferences. Our loan specialists will also help to guide you through the process to ensure it is the right move for you.

Topics: Home Equity