Home Equity Loans: Steps for Success

Since all home equity loans are not created equal, you might find it frustrating when you consider your options. Make your life easier by taking a logical, organized approached to equity loan shopping.

In Alfred Hitchcock's movie, The 39 Steps, a man is caught in a web of intrigue that complicates his life and causes it to spin out of control. To avoid being caught in a similar circumstance when shopping for your home equity loan, here are five steps that will keep things simple and easy:

1. Shop around for the best deal. Start with your existing bank or credit union. You may also consider gathering bids online or responding to advertisements. Just remember to be skeptical about promises that sound too good to be true.

2. Know the product. Home improvement loans come in two flavors: the home equity loan or the home equity line of credit (HELOC). Know the basics of each so that you can assess which one is right for you.

3. Ask questions. Obtain a firm understanding of the points, APR, and closing costs associated with the loans you're considering. These items are detailed on the Good Faith Estimate, a document that the lender must provide within three days of receiving your loan application. One point to note when comparing your options: The APR for a home equity loan includes closing costs, while the APR for a HELOC does not.

4. Choose a rate structure. Home equity loan rates can either be adjustable or fixed. The interest on adjustable loans can fluctuate, exposing you to the risk of increasing costs. Fixed-rate loans have less risk, but can sometimes cost more for homeowners who end up selling in a few years. If you're uncertain how long you'll keep the property, consider asking your lender about a hybrid adjustable loan with a fixed introductory rate.

5. Know your closing costs. The Good Faith Estimate includes a quote on closing costs. Unfortunately, the actual costs at closing are often different from those on the estimate. Most of the fees are assessed by third parties, and therefore not under your lender's control. Ask your lender how closing cost changes are handled.

Equity loan shopping shouldn't be shrouded in suspense. Follow the steps and make your way to equity financing success.