A home-equity loan can be a good tool for savvy homeowners looking for a convenient way to borrow money. Many home-equity loans offer an attractive interest rate (compared to those offered by credit cards and other types of loans), and borrowers can deduct the interest when they file taxes. But not all home-equity loans are alike. Getting a loan that offers competitive rates, fees and terms takes a little extra effort. Here are a few items to keep in mind when you start shopping for a home-equity loan.

Before you go on shopping for a loan, remember leveraging your home for cash is a big decision. Make sure you know the different types of home-equity loans as well as the factors that determine whether it's a sound financial decision. (To learn more, see The Home-Equity Loan: What It Is And How It Works, To Rent or Buy? The Financial Issues - Part 1 and Mortgages: How Much Can You Afford?.)

First, Take a Look at the Largest Costs
The single largest cost associated with most home-equity loans is interest. When comparing loans, keep in mind that the annual percentage rate (APR) is calculated differently on a traditional home-equity loan than on a home-equity line of credit - the first has a fixed interest rate and the second has a variable interest rate. The APR for a home-equity line of credit is calculated based on the loan's interest rate. The APR for a traditional home-equity loan generally includes the costs of initiating the loan. Because of this difference, a direct comparison between fixed-rate loans and variable-rate loans cannot be made.

Regardless of the type of loan, the expense incurred by paying interest provides you with a powerful incentive to pay off the loan early. Keep in mind, however, that both traditional home-equity loans and home-equity lines of credit may charge a fee if you pay off the debt prior to the agreed date.

Second, Check out those Hidden Fees

Interest is the largest single cost associated with most equity loans, but it is not the only expense borrowers face. Taking out a home-equity loan or a home-equity line of credit imposes the same fees as a mortgage. These fees include closing costs such as attorney fees, title search, document preparation and insurance. They also include an appraisal to determine the market value of the property, an application fee for processing the loan, points (one point is equal to 1% of the loan) and an annual maintenance fee.

If you choose a home-equity line of credit, you may be required to pay a transaction fee each time you make a withdrawal, and an inactivity fee if you don't use your line of credit over a given period. When comparing fees of different loans, keep in mind that some lenders will waive closing costs and other fees, so be sure to ask for a waiver. (To learn more, see A Tax Primer For Homeowners, Mortgage Points - What's The Point?and The Mortgage Interest Tax Deduction.)

Third, Do your Shopping...Smartly

Any time you're shopping for a loan, be sure to compare the programs offered by a variety of lenders. Your local bank may have a perfect loan for your needs, but don't overlook the programs offered by credit unions. Many credit unions are easy and free to join and offer home-equity loans with lower fees and interest rates.

The internet is a convenient marketplace that enables borrowers to quickly compare the loans from multiple vendors. You can surf the web anytime of the day or night and get instant access to loan providers from across the country. Even if you prefer to conduct transactions face-to-face, online shopping can provide information to help you negotiate the best deal and may help you find a loan provider nearby.

Once you've identified a competitive loan program, it's time to ask questions. While you may have been attracted to a particular program based on its low interest rate or origination fees, it is important to pay attention to all the details and factor in the total cost of the loan rather than focusing on a single feature.

Talk to the lender about pre-payment options. Ask if there is a penalty for retiring the loan early, and make sure you understand the repayment schedule. Ask also if the loan is structured with a balloon payment, which requires a full repayment of any outstanding balance at the end of the loan term - if your repayment schedule caused you to repay only a small amount of the principal over the term of the loan, this balloon payment could be more than you can handle. If you take a home-equity line of credit, ask about the cap on the interest rate and find out how high the payment can go before the cap applies.

Finally, Choose Wisely
Because you are using your home as collateral, it is particularly important that you consider carefully all elements of any home-equity loan prior to taking it. Borrowing against your house puts you at risk of foreclosure should you be unable to repay the debt, so make sure you understand what you're getting into and that you can afford to repay the loan before or when its term ends.

To continue reading, see Paying Off Your Mortgage, Understanding the Mortgage Payment Structure and Mortgages: The ABCs Of Refinancing.

Related Articles
  1. Chart Advisor

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  2. Home & Auto

    5 Luxurious Ways to Boost Your Home's Resale Value

    Not all renovations are created equal. Here are five that are most likely to make a property appreciate (and be appreciated by househunters).
  3. Credit & Loans

    5 Credit Cards For the Super Rich

    Understand the difference between an average credit card and an elite credit card for the wealthy. Learn about the top five credit cards for the super rich.
  4. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  5. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  6. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  7. Credit & Loans

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  8. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  9. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  10. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  1. How do I calculate how much home equity I have?

    Even though it is normally assumed most people know their home equity, many are still confused about the topic. It is an ... Read Full Answer >>
  2. Is the interest on a home equity line of credit (HELOC) tax deductible?

    If you need access to cash and have equity in your home, a home equity loan or line of credit can be a perfect solution. ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  5. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  6. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!