No Cost Home Equity Loan

Home equity loans can be a very useful method of freeing up the equity in your home when you face large expenditures especially during times when you’re strapped for cash. By using your home equity as collateral, a lender will offer you a sizable loan often much more than you would qualify for with a regular loan.

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However, just as with a regular home loan there are usually closing costs associated with home equity loans. Since there’s a good chance that you’re taking the loan as you need as much cash as possible to pay for hospital bills, a child’s college tuition or remodeling you probably won’t be besotted with the idea of handing over a large sum of money on closing.

To avoid these costs, many borrowers opt for what is called the no-cost home equity loan. Essentially, the borrower can avoid the closing costs by rolling them into the principal of the loan, and accepting a higher rate of interest to compensate.

Since the interests rates with a no cost home equity loan can be a point or more higher than with a regular equity loan this option probably wouldn’t be a wise choice for borrowers who intend to repay it over a long period. If you plan to pay off the loan within a few years you can probably come out ahead, but over a long repayment period you may lose thousands in additional interest charges.

As with all credit agreements, you should sit down and do the math before you sign on the dotted line. Only you understand your circumstances, and only you can decide which option will be best for you. Best get out the old abacus.