Don't Get Trapped by Home Equity Loan Pitfalls

Even if you've never hacked your way through a jungle, you can imagine there are plenty of pitfalls. Poisonous snakes, annoying insects, and dangerous species-these are all perils you face when you veer off the beaten path. Tapping your home equity is no different. With a home equity loan, there are as many pitfalls as there are animals in the jungle. However, armed with a few essential facts, you can find a home equity loan that will do more help than harm.

Home equity loans and HELOCs: Two different animals

Even though home equity loans and home equity lines of credit (HELOCs) are both second liens on your home, there are significant differences between them. A home equity loan has a fixed rate, fixed loan amount, and fixed repayment schedule. In contrast, a HELOC works like a credit card. It offers a variable interest rate, and you only tap equity when you need it.

The wild over-spender

If you tend to overspend, borrow only the amount that you truly need. Banks are more than happy to lend you more and more money. Tap too much, and you may wind up spending thousands of dollars in long-term interest.

Avoid first lender quicksand

Don't go with the first lender you find. There are hundreds of home equity lenders-compare their rates and closing costs. Negotiate your deal and take your time. Remember, you're the buyer. If a lender knows you're shopping around, he may sweeten the deal.

Don't let costs sneak up on you

A common tactic among unscrupulous lenders is to sneak hidden costs onto a loan, and surprise the borrower with increased expenses at the closing. Avoid this high-pressure tactic by scrutinizing costs before the closing. They'll be detailed in a Good Faith Estimate, which your lender is required to provide. While it's true that the initial statement is just an estimate, final costs should be within a reasonable neighborhood from the original estimate.

A home equity loan can help you hack your way out of a jungle of heavy debt. Be mindful of the above tips, and you can avoid the most common home equity loan pitfalls.