A home equity loan is an easy way to get cash when you need it, but getting this loan is not a small decision. Here are some common mistakes that you may make while taking a home equity loan:

Not preparing income documentation in advance
Lenders prefer borrowers who have a high and stable income that comes through regularly. If your income is variable because you are self-employed, getting a loan from the equity in your home may become a difficult task. Normally, a borrower is asked to show tax returns of at least two years to secure an equity loan. Additionally, the borrower should collate all the income verification documents in advance and must furnish these to the lender as and when needed. It is wise to find out how much loan you can afford before sending in the application for the equity loan.

Not reading the payment terms carefully
A lot of foreclosures were reported during the housing bubble among homeowners who got approved for equity loans. Problems faced by them included balloon payments or low teaser interest rates. A surprise payment hike can be avoided by understanding all the terms in advance. Some of the questions that you should ask initially are:

• What are the circumstances under which the interest rates may increase?
• What is the ceiling up to which the interest rates can go?
• Will the payments throughout the life of the loan be the same?
• In case you decide to pay off the loan early, or if you decide to sell the home, will there be any prepayment penalties?
• What will be the total cost of borrowing the money?

Converting unsecured debt into secured debt
Until the 2008 housing bubble, a lot of customers tapped into equity loans to pay off credit card debts. This is not a wise move because you convert unsecured debt to secured debt. A credit card debt is unsecured, which means that there is no collateral. If you do not pay it back, the lenders cannot come and seize your assets. On the other hand, in case of an equity loan, the collateral is the house. The bank has the right to take possession of the house if the loan is not repaid. As a rule of thumb, never take any secured loans to pay off an unsecured loan.

Not understanding options clearly
Many people take equity loans in haste. For example, you might take an equity loan to buy a car, but you must remember that the value of the car depreciates and using an appreciating asset, like your house, as collateral is not a good decision. Similarly, if you wish to take a loan for your child’s college education, an equity loan is not the only option. There are many other options like a car loan or a student loan which are purchase specific. Never use your house as collateral when you can avoid doing so.