Before You Take That Loan

Taking a loan is the easiest part of a deal. Making plans to repay the loan and ensuring that you repay on time, is the big headache. In the case of a home equity loan, it not only constitutes a headache but also a fear of losing your home. So, before you enter into any agreement, you must first consider how you will pay back the money you borrow.

Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But in this case, the portion that goes toward principal may not be enough to repay the principal by the end of the term. There are other plans that allow payment of interest alone during the life of the plan. One thing you should remember is irrespective of your payment mode, you should have made preparations to pay off the loan. Federalreserve.gov reports:

Whatever your payment arrangements during the life of the plan--whether you pay some, a little, or none of the principal amount of the loan--when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this "balloon payment" by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.

Read more: When your home is on the line