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Is it wise to take out a home equity loan?

If you own your home, it is most likely your greatest single asset. That is why it is important to be careful when agreeing to a home equity loan. Homeowners--particularly elderly, minority, and those with low incomes or poor credit--should be careful when borrowing money based on their home equity. Why? Certain abusive or exploitative lenders target these borrowers, who unwittingly may be putting their home on the line.

You can protect yourself from being a victim of loan crooks by following these tips:

  • Ask specifically if credit insurance is required as a condition of the loan, and shop around for the best rates.
  • Keep careful records of what you’ve paid, including billing statements and canceled checks. Read all items carefully.
  • Consider all costs of financing before you agree to a loan.

Ask the following questions:

  • How long is the term of the loan?
  • What is the interest rate? If it’s adjustable, how much can it change, how often can it change and is there a maximum?
  • What is the annual percentage rate (APR)? If the APR is significantly higher than the stated interest rate, something is seriously wrong.
  • Are there any annual fees, transaction, or loan origination fees?
  • Is a complete list of all closing costs supplied?
  • Do I need this money bad enough to risk losing my house?

Be suspicious if lenders appear not to have a regular place of business or those who actively solicit you - especially if they have information about your personal financial situation or hesitate to disclose all the terms of the loan.

The major disadvantage of home equity financing is your home is at risk if you can't make payments. Before taking out a home equity loan, be sure to ask:

  • how large is the credit line?
  • how long is the term of the loan?
  • what's the minimum and maximum monthly payment?
  • what's the interest rate?
  • what's the annual percentage rate? (it shouldn't be much higher than the stated interest rate.)
  • are there any annual fees, transaction fees, or origination fees?
  • is there a complete list of all closing costs?




Facts for Consumers "Home Equity Loans: Borrowers Beware!" The Federal Trade Commission, April 1998

Talking Dollars Makes Cents, Patrice Dollar, UO/E Consumer Education Specialist

"When Your Home is on the Line," Federal Reserve Bank, 1994







Written by:
Sandra McKinnon, Consumer & Family Economics Specialist, University of Missouri Extension

Cynthia E. Crawford, Ph.D., Consumer & Family Economics Specialist, University of Missouri Extension











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Last update: Saturday, July 26, 2008




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