Wednesday, May 12, 2004

Nail down credit details before applying for a home equity loan

In spring, young thoughts may turn to love, but for many homeowners, their thoughts turn to a room addition or a kitchen renovation. And as low interest rates and rising real estate prices help more homeowners build equity faster, many are using that equity to make home improvements. Borrowing against the equity in your home makes sense for many reasons, but you should consider all your options carefully before making a decision.

Home equity loans can be more attractive than other kinds of credit because, in many cases, you gain some tax breaks on interest. Additionally, because the loan is secured by your home, it will likely have a lower annual percentage rate. However, home equity loans aren’t right for everyone or for every situation, so make sure you carefully weigh the pros and cons before putting your house on the line.

“You’ll also want to be sure your credit report is in good shape before you apply for a loan,” said Maxine Sweet, vice president of public affairs for Experian, a global information solutions company.

There are two basic types of home equity loans: lump sum loans, which work like second mortgages, and home equity credit lines, which work more like credit cards. In both cases, the amount you can borrow is limited by the equity you have accumulated in your home. You can calculate your equity by subtracting the unpaid balance of your mortgage from the fair market value of your home.

“Other factors, such as your credit history, income and current financial responsibilities are also taken into account,” said Sweet.

To make sure your credit history won’t hold you back from qualifying for a home equity loan, visit an online credit reporting service such as www.experian.com to quickly and easily access your credit report. Make sure all the information on your credit report is accurate. It is not unusual to have variations in your name or address. The important facts are whether all the accounts being reported are yours and if the payment histories reflect the way you have actually made your payments. If you notice anything questionable, deal with those issues before applying for a home equity loan.

Making the right choice

With a lump sum home equity loan, you receive the full amount of the loan when it is opened, and pay it back in fixed monthly installments over the life of the loan. This type of loan can be good for debt consolidation, buying a car, education fees, major home improvements like additions, or paying large, unexpected bills.

A home equity line of credit allows you to draw off your loan as you need it, usually by writing a check. Your monthly payment is usually a percentage of the total outstanding principal. This type of loan offers lots of flexibility, because you can borrow (and pay interest on) only the amount of money you need at the moment.

Here is a checklist of items to consider as you shop for a home equity loan:

• Make sure all costs, fees, terms and charges are disclosed.

• Find out the variances to your interest rate, if applicable, including the “cap,” or ceiling, and the amount of the margin.

• Look into all conditions that may apply to your credit line, such as a minimum amount per withdrawal.

• Find out your repayment options.

Make sure you have all the facts before making your decision. Remember, your house is being used as collateral, so be certain you are able to make your payments on time, or you risk losing your home.

For more information on checking your credit report, visit www.experian.com.

— ARA Content