6 Questions to Ask When Choosing a Home Equity Loan

1. Do I need a home equity loan or a home equity line of credit?

If interest rates are low, a loan is a smarter decision. You can obtain the full amount at once and get a fixed rate on the full sum. The advantage lets you know how much to budget for monthly payments.

On the other hand, a line of credit will let you borrow from a revolving line of credit with volatile interest rates. You access the resources just like a checking account by writing a check for the purchase. Then the amount used is paid back. If the rates fluctuate, your payments will too.

2. Are there restrictions on how I use the borrowed cash?

Most loans and lines of credit can be used for a number of things. Whether you want to meld all your debts into one, do some home remodelling or pay for schooling, an equity loan or line of credit can be the answer.

Be sure to ask yourself if you can afford the extra payments. Is your budget manageable enough? Will adding another outlay not over-extend a strained budget?

3. How do I obtain the best interest rate?

Your best bet to choose the variety of interest rates offered by financial services companies is to shop around. Ask questions. Try to find a company you're comfortable doing business with. Look for ones that don't charge application fees. Ask about charging a penalty for early payoff.

4. What is the duration of the loan? Is it better to get a 5- 10- or 15 year term?

You'll want to determine what your financial future strategy is when deciding on the term of the loan. If you're planning to retire soon, you may want to ask for a shorter term. The longer your loan terms, the lower your monthly payments.

5. Are there any tax advantages to borrowing with a home equity loan?

There are many good tax advantages to home equity loans and lines of credit. The interest is tax deductible on your federal income tax. Be sure to consult your tax advisor before applying for a loan to be certain of the deductions.

6. Is the loan application lengthy and how long before I get an answer?

More and more lenders are allowing consumers to apply for loans over the phone or on the Internet. It can take as little as 10 minutes for the application process. And many pre-approvals can be delivered in a few hours. Final approval often takes any where from 5 - 10 days while evaluating your house is taking place. Often the entire process can be completed without leaving your home with final documents and checks being sent through the mail.