It’s easy to make mistakes, especially when applying for mortgages. However, when it comes to cashing out your home equity, one needs to be extra careful knowing your home is on the line. Make the wrong move, and you lose your chance of getting approved. Use it the wrong way, and you’re increasing your risk of losing your home.
So, if you’re seriously considering on applying for a Home Equity Loan, you need to make sure you understand the terms, rates, and conditions, do your research in finding a lender and avoid the following mistakes to dodge the costly consequences.
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Thinking A Home Equity Loan Is The Same As A HELOC
HEL is a one-time mortgage wherein you can withdraw the available funds in cash. As for Home Equity Lines Of Credits, the funds are deposited into your account which you can draw on a set amount whenever you need to use the funds.
Good Read: Home Equity Loan vs. HELOC
Signing up with the first lender to offer a high Loan-To-Value Ratio
An LTV Ratio refers to the amount you can borrow through a home loan to your home’s equity. Most lenders only allow their borrowers to have 80% of their equity, while others go as high as 90%. If you don’t have an immediate and desperate need for such a high amount, it would be best to shop for a good mortgage lender who offers good deals and only borrow what you need and can afford to pay back.
Using the funds for expensive purchases and luxurious trips
Fancy vacations and a brand new car may seem like a dream come true for most people, but if your primary reason for taking out a HEL is to fund such recreational activities and expensive buys, then you’re putting your home and future at risk. One of the most crucial Texas Home Equity Loans Rules one must keep in mind is to put your funds into good use like to consolidate debt or pay for home improvements with high ROIs. With your home at stake, it only makes sense to use the funds in the best way possible.
Disregarding the consequences if you fail to repay the loan
Just because your home equity loan is a smaller loan compared to your first mortgage or your home’s equity doesn’t mean you should go ahead and use it any way you want. Like most loans, HELs has its pros and cons. Three of the most critical factors you need to consider is the risk for foreclosure, how you plan on paying off the debt and how and where you plan on using the funds.
Not having a contingency plan
Things won’t always go our way and how we expect them to turn out. Sure, you may have a steady flow of income, but if you plan on opening up new lines of credits soon, how do you expect on accommodating your debts? What if your plans never materialize? Make sure you have a strategy that focuses not only on how you will pay off the loan but what other things you can do to make sure you have a backup plan in case Plan A fails.
Good Read: The Benefits of Contingency Planning