Here are the top 10 home equity line of credit mistakes that consumers often commit:
1. Not being aware of the pre-payment penalty clause. The pre-payment penalty clause requires the home buyer to pay a penalty fee in the case he decides to pay off the entire amount of his loan. Penalty fees vary depending on the conditions that apply. A pre-payment penalty may apply only to refinancing, to a home sale, or both. Be sure that you check the pre-payment penalty clause in your contract.
2. Obtaining a large credit line. A credit line that is too high puts the borrower at risk. Other creditors can also decline your application if the see that your credit line is too large.
3. Thinking that a home equity loan is the same as a home equity credit line. An equity loan is different from a credit line. With an equity loan, the borrower receives the whole sum of money borrowed up front while a home equity credit line allows the borrower to take cash advances from his/her credit line during the whole term of the loan.
4. Signing up for the first home equity creditor without comparing rates. Most people apply for a home equity credit line from their banks without shopping checking other lending companies. You may not be getting affordable rates from your bank that you can get from other lenders.
5. Not asking for the good-faith estimate of the loan. Be sure to ask your lender for a copy of a good-faith estimate of your loan costs days before the actual closing. You should already be aware of the exact payments you will be paying before the day of the closing.
6. Thinking that a home equity credit loan is tax deductible. This type of loan is not always tax deductible. Be sure to check from the IRS if your home equity credit loan can qualify for a write-off.
7. Applying for a home equity credit line with plans to refinance. If you have plans of refinancing your first mortgage loan, do not apply for equity credit right away. Some lenders do not accept refinancing if the borrower has already obtained a home equity credit loan.
8. Obtaining a home equity credit line to pay credit card debts. Putting your home on the line just to pay off your credit card bills isn’t worth it. You can lose your home property if you fail to keep up with your home equity credit loan.
9. Thinking that a credit card is more expensive than a home equity line of credit. Some people choose to apply for home equity line of credit rather than a credit card, thinking that it’s a lot cheaper. However, remember that a home equity loan isn’t always tax deductible. In fact, it can even be more expensive than a credit card. Furthermore, it puts your property on the line so it involves more risk than a credit card.
10. Not checking the lifecap. The “cap” is the highest limit of interest that can be applied to your home equity line of credit. Some equity loans start with low introductory rates only to soar in the middle of the loan’s term. Thus, see to it that you are aware of the “lifecap” of your loan.