Although home equity loans can be used to pay off debt, fund a college education, or pay for a nice vacation, there are certain things you should be aware of, such as the following:
(1) Watch out for home equity loans that offer a very low introductory rate that increases dramatically to a very high regular rate;
(2) Find out if the loan comes with prepayment penalties. You might want to pay off the debt as fast as possible and don't want prepayment provisions to prevent you from doing this;
(3) Variable rate loans must have a cap that sets an upper limit that the interest rate cannot rise above. If this cap is ever reached, the lender has the right to shut down the line of credit; and
(4) A lender can call in the loan and demand full repayment if your home loses a significant amount of value. Similarly, if your income decreases or your financial health suffers, the lender can cancel a home equity line of credit.
