How to Obtain a Home Equity Loan

Need to pay taxes or college expenses, or make home improvements? If you need cash, the source could be right under your feet. Look at a home equity loan for very low interest rates and flexible terms. Shop around and nail down the best deal possible.

Instructions

1. Understand that a home equity loan is based on the equity in your house--the value of the property less what you owe on your first mortgage. For example, a $200,000 home with a $125,000 mortgage has $75,000 in equity.

2. Investigate lines of credit. A home equity loan is a pure loan with established payback terms. A line of credit can be used as you wish and offers greater payback flexibility--usually a minimum payment based on how much of the credit you have accessed. If you don't know how much that wedding is ultimately going to cost, for instance, a line of credit based on a high estimate may work out best. Or if your expenses will occur over several months, as in a remodeling project, a line of credit to draw on will end up costing less than a major loan at the start.

3. Find out how much you can borrow. Most home equity packages will let you borrow up to the point that your total debt--mortgage and home equity loan--reaches between 70 and 90 percent of the home's value.

4. Watch interest rates. Although home equity loans are less expensive than regular mortgages, interest rates will vary. Sites such as Bankrate.com display rates.

5. Keep an eye on costs. Compared to mortgages, home equity loans and lines of credit are currently dirt cheap. Many let you set up one at no cost at all and may offer low "teaser" interest rates for as long as one year.

6. Apply. Bring tax returns and proof of income.

Tips & Warnings

• Home equity is a great way to consolidate other debt, such as credit card. One big plus: The interest is tax deductible on your primary residence; credit card interest is not.

• Home equity loans are currently exceedingly competitive, so ask at least two lenders for rates and terms.

• Beware of quickie home equity loans that are promised in days instead of the typical two-week time frame. Although these loans are legit, they cost more in higher interest rates. Unless you absolutely need the money in a week, be patient and save yourself some cash.