How to Apply for a Home Equity Loan

Before you apply for a home equity loan, understand the risk involved. If you should default you will lose your home even if your home's value is greater than the amount you owe.

Home equity loans use home equity interest as collateral. If you apply for a home equity loan and are approved, it will free up cash that can be applied towards whatever purposes you choose: home improvement or repair, the purchase of a new car, medical expenses, debt resolution, education costs or even a vacation. The interest rates are lower than most major credit cards, and in some cases, tax deductible.

How to Apply for a Home Equity Loan

Know how much equity you have in your home in order to have to a good idea of how much you will be able to borrow.

Apply for a home equity loan with your bank or financial institution before applying with anyone else. You already have a relationship with your financial institution and chances are it will want to keep your business. Your current financial institution will likely want to work with you to get you the most attractive terms for which you qualify.

If you don't have an existing relationship with a bank or financial institution, seek out local financial services companies and banks that focus on home equity loans. You can also get word-of-mouth recommendations from real estate brokers and mortgage brokers.

Know your credit score. When you apply for a home equity loan, as with most loans, the lender is going to thoroughly review your financial circumstances. Credit scores range from 450 to 800, with 800 as the best. Only approximately 1% of the population has the best credit score of 800. Any score over 700 will probably qualify you for the best interest rates, but a score lower than that doesn't necessarily disqualify you from getting a home equity loan with manageable interest rates.

The bottom line is that your credit rating is going to be a prime factor determining how good your interest rate is going to be, so get a copy of your credit report in advance and know what's in it. Be ready to discuss it with the lender, and request that any errors be removed from your report before you apply for a home equity loan with any lender. You can also research the home equity loan deals available online.

Finally, decide if you want a fixed interest rate or an adjustable interest rate. However, you should also realize that depending on your financial circumstances, including the amount of home equity you have and your credit score, in some cases you may not get to choose.