10 questions to ask before getting a home equity loan: A homeowner’s checklist
Use this checklist to determine whether a home equity loan fits your financial goals, budget and borrowing needs.
If you’re wondering whether a home equity loan is right for your situation, the answer depends on factors such as your budget, existing debt, repayment capacity and how you plan to use the funds. The questions below can help guide your decision.
Life can be full of major—and sometimes unexpected—costs, whether it’s college tuition, a much-needed home repair or a medical emergency.
When these expenses pop up, a home equity loan can be a convenient and less-expensive way to cover them, take on a pricey project or pay off high-interest consumer debt. But borrowing against your home also comes with certain considerations.
A loan may help patch over some of the current shortfalls in your budget but it can also, if not treated wisely, create problems down the road. If you’re spending more money than you make, for example, then adding a new loan repayment may not be the right step to take, as it could put your credit rating—and even your home—at risk.
However, no two situations are the same. A home equity loan can be a cost-effective way to make value-enhancing renovations to your property or to consolidate and pay down existing debts. And home equity loans can come with flexible terms and repayment options that you can customize around your current needs.
Questions to consider
- Do I currently live beyond my means? What other debts do I have? If I subtract my expenses from income, is there a deficit? Learn more about creating a budget.
- Do my planned home improvements add resale value (like adding additional square footage or a kitchen or bath remodel), not just personal convenience like a swimming pool? Learn more about resale value and renovations.
- Would it make better sense to use other collateral like a car instead of my home to finance a loan? Learn more about collateral.
- How will taking out a home equity loan impact my debt-to-income ratio? Learn more about debt-to-income ratios.
- What costs in addition to interest on the loan might be involved with taking out a home equity loan, such as a home appraisal, closing costs, state taxes or annual fees? Can I afford these expenses? To help understand these costs, talk with a banker at Regions and also review the details of home equity loan fees.
- What type of repayment schedule might best suit my needs? (A home equity line of credit might be more appropriate for long projects with varying expenses.) To see what your repayments might look like, use this calculator.
- Can I benefit from tax breaks associated with a home equity loan? When it comes to tax-related concerns, it is a good idea to talk to a tax expert or certified public accountant.
- Can I manage this debt if I experience an unexpected financial setback, such as unemployment? Could I pay off debt rapidly if necessary? Unexpected expenses and setbacks can be frustrating, so as a part of your overall budget, establish (or grow) an emergency fund.
- Are there prepayment penalties or negative amortization, where monthly payments don’t fully cover interest costs? Talk to your Regions banker to better understand these loan features.
- If I want to sell or rent my house during the loan term, will the terms of the loan allow me to do so? If I can sell or rent during the loan term, how will that affect my ability to repay? Talk to your Regions banker about how selling or renting the property could affect the loan.
Two things to do
- Compare home equity loans, HELOCs and mortgage cash-out refinance to other lines of credit to see which option is best for you.
- Use our calculators to run the numbers and see if a home equity loan makes sense.
Frequently asked questions
A home equity loan allows homeowners to borrow against the equity they have built in their home and repay the loan through fixed monthly payments.
A home equity loan may be useful for major expenses such as home improvements, debt consolidation or unexpected costs, but borrowers should carefully evaluate their budget and ability to repay the loan.
Consider your current debt, monthly budget, loan costs, repayment terms, debt-to-income ratio and ability to manage payments during an unexpected financial setback.
You may also want to review resources on budgeting and assessing your debt before borrowing against your home’s equity.
A home equity loan typically provides a lump sum with fixed monthly payments, while a home equity line of credit (HELOC) allows homeowners to access funds as needed during a draw period. To better understand the differences, compare home equity loans and lines of credit before choosing a borrowing option.
