Many homeowners think about using the equity in their home to borrow money, but there are a number of factors and risks to consider before making this important decision. The more you understand about Home Equity Loans, the more in control you will be when you look for a lender.

Home Equity loans provide many advantages, including tax savings and additional cash, which can help pay down high-interest debt or cover a major expense. These loans carry risks, however, including the chance that you could lose your home if you can't afford to pay back the loan.

• If you are getting the loan to consolidate debt, is the loan effectively decreasing your overall monthly payments?
• Does the new loan reduce your loan term (say, from a 30-year mortgage to a 20-year mortgage) or reduce the total interest you are currently paying? If not, you are better off finding alternative financing options.
• Is the loan amount at least $10,000 or 10% of your equity? If not, you may want to look at other options, such as unsecured loans, which don't involve your home equity.

Before signing a loan agreement, make sure you are comfortable with the monthly payments and understand the payment terms.

If a lender suggests that you inflate your income or does not ask for verification of income, they may not be acting in your best interests.

Before making the decision, ask yourself:

• After all of your other monthly expenses have been paid, will you be able to make the loan payments?
• If you are using the loan to pay off other debt, can you discipline yourself to avoid getting back into debt again?
• Is the income you're putting on your application reliable? (i.e., does it come from a job, or is it anticipated income from other sources, such as alimony, child support, etc.)
• If your circumstances changed (i.e., you or your spouse became temporarily unemployed or disabled), would you still be able to make the payments?

Before you sign an agreement, make sure you understand the terms of the loan clearly:

• What is the term of the loan (how many years/months do you have to pay it back)?
• Is the interest rate fixed or adjustable?
• What fees and/or points are included?
• Will you be charged a pre-payment penalty if you decide to pay the loan off early?
• Does the loan include a "balloon" payment at the end of the term?
• Does the loan include financing of other products, such as credit insurance?
• Is the interest rate on the loan documents the same interest rate that you agreed to before closing?

A note about interest rates and payment schedules:

It is important to understand the difference between a fixed interest rate and an adjustable interest rate. With a fixed interest rate, the rate should not change during the course of the loan term. With an adjustable interest rate, you are exchanging the benefit of a lower introductory interest rate for the possibility that interest rates might increase over time. If interest rates increase, you may start out with a low interest rate but end up with a much higher rate. Make sure you understand how a change in rates will affect the payment amount, as this may impact your ability to pay back the loan.

Credit insurance provides valuable protection against unforeseen circumstances such as job loss or disability, which may impact your ability to pay back a loan. However, the decision to accept or decline this insurance is, and should always be, your choice. Credit insurance should never be a requirement of a loan.

• Is credit insurance a requirement of the loan?
• Is credit insurance included in the total amount financed?
• Can you quote payment amounts with and without the credit insurance option?
• If I choose to sign up for credit insurance, can I cancel at a later date?

Closing a loan can be a long and tiring process, with many forms to sign. Despite the amount of paperwork, don't leave any items unsigned or spaces blank. If a lender tells you not to worry about specific items, or to leave them blank, that should be cause for suspicion.

Leaving forms unsigned or allowing the lender to fill in loan terms after the closing may leave you vulnerable to unethical practices, such as changes to the interest rates or terms of the loan without your knowledge.

• Make sure you understand the interest rate, payment amounts, and term of the loan before you agree to anything
• Read everything before you sign it
• Ask questions if you don't understand the terminology or specifics of your loan agreement

Don't:

• Enter into a loan if you can't afford to make the payments
• Sign anything you haven't read
• Leave contract terms open for the lender to complete
• Sign up for products you don't want or need
• Be afraid to ask questions