Questions to Ask When Considering a Home Equity Loan

Before you take out a home equity loan, the first question you should ask is, "How much equity do I have in my home?" Then consider these questions to help you determine if you’re ready for more debt.

• Do I currently live beyond my means? What other debts do I have? If I subtract my expenses from income, is there a deficit?
• 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)?
• Would it make better sense to use other collateral like cars instead of my home to finance a loan?
• How will taking out a home equity loan impact my current credit score and my debt-to-income ratio?
• 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?
• 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.)
• Can I benefit from tax breaks associated with a home equity loan?
• Can I manage this debt if I experience an unexpected financial setback, such as unemployment? Could I pay off debt rapidly if necessary?
• Are there prepayment penalties or negative amortization, where monthly payments don’t fully cover interest costs?
• 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?