Is A Home Equity Loan For Me?

If you are like most people, you receive a great deal of junk mail. After you throw away the three new offers for credit cards that you get each day, you might come across something asking you to refinance your home. It probably says something like, “Let your equity work for you!” It might entice you to take that dream vacation you’ve always wanted or start that home improvement project you’ve been putting off. It probably says something like “No Closing Costs!” or “Free to Apply” or “Instant Answers!” They may include unbelievable terms like “Get a $500,000 mortgage for $500 per month!” Every claim they make starts to seem better and better. But is this for real?

The truth is there is an alarming trend that is taking place in the United States today. Many companies prey on the average consumer on a daily basis. The more they can get that consumer in debt, the better. The longer the terms, the longer the company makes money off of them. What may seem like the answer to your financial prayers, can very likely be a huge mistake. The fact is that when in comes to any financial matter, common sense rules.

Do you really think that refinancing your house in order to take a dream vacation is sound financial advice? Do you really think it will somehow help you to borrow more against your house to modernize your bathroom? In most situations these would not be in your best interest.

However, there are times when a home-equity loan can help. In many cases, Americans pay nearly 20% interest on four or five credit cards. When those same Americans own a home and have been paying on it for years, it might be best to refinance. No matter how high mortgage interest rates get, it will always be better than credit card interest.

If you do decide that a home-equity loan is for you there are several things you must look out for. Although there are many reputable lenders out there, there are also many that are trying to get the better of you. Many lenders practice what is called equity stripping. This is when a lender convinces you to “pad” your income on your loan application so that you can get a bigger loan. It turns out to be more money than you can really afford. Once the closing costs and all the hidden fees are calculated, the cash you receive is less than what you paid to get it. Then by the time you figured out that you got screwed, it’s too late to refinance again. They tacked on a prepayment penalty that would cause you to lose several thousand more dollars if you refinance again. You have worked hard for your equity. Don’t just hand it away to the first person that asks for it.

When you are shopping for a loan, there are a few things to keep in mind. Don’t ever let anyone pressure you into signing something you don’t want to sign. The lender needs your business more than you need the loan. You are in the driver’s seat. Also, don’t ever let the promise of lower monthly payments or upfront cash cloud your good judgment. If the numbers don’t add up, don’t do it. If the loan includes add-ons that you don’t want, ask the lender to remove them. You don’t ever have to take credit insurance if you don’t want it.

Overall, there are many factors to consider when deciding whether to get a home-equity loan. Is it in your best interest? Are you using common sense? Are the terms agreeable? Are you giving up long term security for short term pleasure? The main thing to remember is to use your better judgment. Don’t ever compromise your future for a few quick bucks.