Understanding a Home Equity Contract

Published January 9, 2013 by

Home equity loans are popular with many homeowners because they allow homeowners to borrow against the equity in their homes and obtain a low interest rate on the loan. Despite their popularity if you are considering taking out a home equity loan it is important to make sure that you understand all of the terms of the home equity contract before you actually sign the loan agreement.

An important consideration that must be understood when taking out a home equity loan is that a Deed of Trust will be placed against your home when you take out the loan. The home equity loan is secured with your home as collateral. Should you default on the home equity loan you could lose your home.

In addition, you should make sure that you thoroughly review the contract to ensure you understand the interest rate that will apply to the loan. Many times consumers are able to obtain a lower interest rate through a home equity loan versus a standard loan. It is still advisable to read through the home equity contract to be sure you know what that rate will be on the amount you are borrowing.

It is important  you understand any other terms that apply to the loan as well. For example, if you are taking out a home equity line of credit rather than a home equity loan, then you should make sure you understand the length of time for the draw period and whether you will be required to make a minimum draw on the line of credit at the onset of the period. Also, check the home equity contract to determine whether you will need to make periodic withdrawals over a specified period of time. Some home equity line of credit contracts require you to make withdrawals from your line of credit every so often within the draw period or the full amount of the loan will become due immediately rather than at the end of the draw period.

Reviewing the contract carefully will ensure you understand all of the details and allow you to maximize your home equity loan or line of credit.