Applying for a Home Equity Loan? Do This First

Every year, homeowners take out billions of dollars in home equity loans and equity lines of credit – and why not? Home equity loans are a great way to tap into the value of your home so you can afford some of life's major expenses, like a home upgrade or remodel, college tuition or a wedding. Many people use home equity loans to consolidate high-interest debts like credit cards and unsecured personal loans. But before you start filling out applications, there are a few things you should do to ensure you're positioned to get the best loan at the best rate possible. Read on to see what you should be doing right now to get the most from your loan:

First, check your credit. If you're applying for a home equity loan - or any type of loan or credit - the first thing you should do is check your credit report. Your credit report is used to determine your credit score – and your score, in turn, can determine whether or not you qualify for a loan. Federal law entitles you to a free credit report every 12 months from each of the three major credit reporting agencies – TransUnion, Experian and Equifax. All you have to do to request yours is to go to a free credit report site (like AnnualCreditReport.com) and download them. Once you have your copies, review them carefully, looking for any errors. Even minor errors may have an impact on your credit score, so be vigilant in your review. If you find an error in the way an account is reported – for instance, incorrect reporting of a late payment or collections report – be sure to contact the creditor immediately to request a correction.

Next, take some time to boost your credit score. Your credit score is based on the information in your credit report. That means that in addition to correcting errors, there are some other things you should be doing to make your report - and your score - as positive as possible. Ideally, you'll begin repairing your credit a few months before you apply for a loan, but even if you only have a month or so, you can still boost your score by a couple points with just a few changes in your buying behavior. Make sure you pay all your bills on time, and if you're over your limit or concerned you'll be late on a payment, call your creditor to let them know and make arrangements so it doesn't appear as a late payment. If you can, pay down the balances on your credit cards; if you're at or near your limits, your credit score will suffer. Ideally, you want to be below 20 percent of a card's limits, but if that's not doable, any decrease in your outstanding balance can help boost your score. Most importantly, if you carry a large balance, avoid using your card during the loan process – and don't take out any new lines of credit until after you receive your loan proceeds.

While you're improving your credit report and score, you should also be improving your home to make sure your home appraises for its full value. Why? Because the appraisal of your home's value will play a big role in determining the size of your home equity loan and the amount of equity you can tap into. It just makes sense to ensure your home looks its best when the appraiser comes to call. Of course, if you're taking out a home equity loan, chances are you don't have a lot of money to spend on major home improvements. But the good news is, you don't have to sink a lot of money into your home to impress your appraiser. Simple things like washing woodwork and walls, deep-cleaning your rooms, renting a carpet cleaning machine, putting some potted plants on your front porch and making sure minor repairs are made can help your home make the best impression during your appraisal.

And finally, know how much money you really need. When interest rates are low or your appraisal is high, it's tempting to take out a loan that's far in excess of what you really need. That can mean you wind up overextending yourself and getting in over your head when it comes time to make payments. To make sure you don't wind up in financial hot water, make a plan for how you're going to use your loan proceeds, including how much you really need to meet those goals – and then stick with it. That means if you're intending to use your loan to pay for tuition, avoid the temptation to slip in a vacation – even if you feel it's well-deserved. Having a plan and knowing your limits are two important steps in responsible – and smart – borrowing.

That's it – four simple steps are all it takes to make sure your home equity loan process is as rewarding and stress-free as possible. Take a few moments right now to get started, and soon you'll be on your way to making your financial dreams and goals come true.

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