A kind of second mortgage, this is the least expensive way to borrow money because you are using your home as collateral. For the same reason, it is also among the most dangerous of loans.
A home equity loan can be used to finance school fees or an addition to your home, but don't use it to back a risky investment - if you can't meet the payments, you can lose your home.
Before signing up for such a loan, ask your banker or lender these questions: -
- What is the annual percentage rate and what is it based on?
- How often and how much can the interest rate change annually and over the life of the loan?
- Are there charges when you've paid off the loan? (Some banks absorb these.)
- What other fees will add significantly to the actual cost of the loan?
- Is there a conversion clause that allows you to change from a variable to a fixed-rate loan to protect against high inflation?
- Are there penalties for early payment?
