Home equity loans can be a useful tool for freeing up funds that would otherwise be locked into a non-income-producing asset. However, they are not without their disadvantages. Before making the decision to apply for a home equity loan, consider the following:
- For most families, their home is their most valuable asset. In Texas, a homestead is protected from the claims of creditors except in a very few instances. So, if you fall behind on credit card payments, or cause a serious automobile accident in which the damages exceed your insurance coverage, you might be sued but you will not lose your home. However, if you fall behind on payments on a home equity loan there is a very real risk that the lender will foreclose. Think carefully about whether you really need the money, and if so whether another form of credit might be more appropriate. Also, be careful not to borrow more than you need.
- While interest rates on home equity loans tend to be lower than some other types of loans, you will still incur expenses in the form of interest and loan fees. You may also be responsible for closing expenses and document preparation fees. Be sure you know how much the loan will cost you. (See the links under the "Other Resources" heading below for help in calculating these costs.)
- Remember that you can only have one home equity loan on your home at a time, you can only get one home equity loan per year, and a home equity loan cannot be converted to another type of loan. It is important to shop carefully for the best deal, because you may later find that it is impossible or prohibitively-costly to make other arrangements if you need more money or if you find a better interest rate.
- Be aware of the time limits associated with making the loan, especially if you must have the funds by a particular date. One problem we frequently see is that borrowers fail to pick up their closing statement the day before the closing. Unfortunately when that happens, the closing must usually be delayed. Delays are not only inconvenient; they can also result in increased costs to the borrower if a fee is charged for re-drafting the loan documents or if the deadline passes on a favorable interest rate lock.
- Read your loan documents carefully before closing to be sure they are correct and that you understand them. Never sign a loan document if you have questions about the meaning of its provisions or if it contains blanks. Texas real estate law can be quite complex, so you may wish to have a Texas real estate attorney review the documents to ensure that they are correctly drafted and to answer any questions you might have. In most cases such a consultation with an experienced Texas real estate lawyer should not require more than one or two hours of billable time (a nominal cost compared to the other expenses you may be paying), and may help you avoid some unpleasant surprises at or after closing.
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