By: BANKMODE.com Staff

Before you rush to apply for a home equity loan, you'll want to give serious consideration to how you intend to use the funds, since you are using your home as collateral. To assist you in making the right decision, here are some potential risks you will want to be aware of:

• Know your upfront costs.  There may be costs for taking out a home equity loan. By comparing several lenders’ rates and fees, you can make a better decision.  Don’t be afraid to question your lender about a fee you don’t understand.
• Getting a home loan is not temporary.  While qualifying for the funds you need may be easy, taking on a long term payment could be detrimental to your financial goals. Replacing one debt with another may not be the best solution.
• Beware of the balloon payment.  Obtaining a low-interest rate home equity line of credit may require making a balloon payment at some point in time.  Unless you decide to refinance, take out another loan, or sell your home before the payment is due; you may have to pay off the balance on your loan.
• Be careful not to overspend.  Since a home equity line of credit acts like an open line of credit, you may be tempted to use your access card or write a check each time you need an infusion of cash.  You might be better off saving these funds for large purchases.  It is always best to have a goal and a repayment plan that works for you.
• Beware of the maximum loan-to-value. Most financial institutions will let you borrow up to 80% of the loan-to-value (LTV) ratio of your home less any outstanding mortgage payments on your property. Some lenders may offer 85% or 90% LTV but those can come with higher rates. Always ask for their best offer. Be careful not to max out your equity, in case home values decrease.