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Step 1
Decide whether a home equity credit line is necessary. People choose to use the equity in their home when they need large amounts of money immediately. For instance, people may access an equity line of credit to pay for a child's college expenses or to make costly home improvements.
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Step 2
Consider the risk involved. A home equity credit line is a loan. Therefore, when the money is used, a monthly payment will be necessary to pay back these funds. This money is also borrowed against the home; consequently, if the homeowner cannot afford to pay back the loan, then their home is at risk. In a worst case scenario, the home could be foreclosed on if the home owner goes into default on their payments.
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Step 3
Shop for a lender. Interest rates for loans can vary substantially. Contact several lending institutions prior to choosing a specific loan option. Ask the lenders about current interest rates, closing costs and repayment schedules
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Step 4
Lean towards a lower interest rate. The interest rate on the equity line is the amount of interest that must be paid for borrowing the loan amount. Interest rates may also be variable which means that the payment for the loan might initially be lower, but increase in the future. Although fixed interest rates might be slightly higher than variable rates, they offer stability in future payments.
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Step 5
Compare closing costs. Some lenders will have higher closing costs for their home equity credit lines. In addition, some lenders are willing to negotiate closing costs which can be beneficial for the home owner who does not want costly closing expenses.
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Step 6
Evaluate the repayment terms. In additional to a changing interest rate, other repayment options must be considered. For instance, some lenders may require a large payment, also called a balloon payment, at the end of the loan. This essentially includes the total amount left to be repaid. It may be difficult to come up this large sum; however, some lenders allow financing for this amount.
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Step 7
Look at the cost-benefit ratio. Once loans have been researched, consider whether the loan is worth the costs associated with it. Closing costs on the loan may include application fees, title search, appraisal and points. For equity lines that are relatively small, these closing costs can eat up a portion of the loan, making it more of a cost than a benefit.
