The best time to take out a home equity loan varies depending on the lender and the home value.

Q: My home will be paid off in February. My bank recommended that I obtain an home equity loan now. They told me that if I waited until after if was paid off I’d lose 30 percent of my equity in my house. I’m only using the cash for debt consolidation so I don’t immediately need the money. Any suggestions? Interests rates are low now, but seem to be rising.

A: First of all, you won’t lose any equity in your home if you refinance now or later. We don’t even understand why someone would tell you that. Perhaps you misunderstood the message the lender was trying to give you.

If your home is worth $250,000 now and the home is worth $250,000 in six months, your equity is what your home is worth less any debt on the home. So, your equity increases as you pay down the mortgage you have on your home. Once your loan is paid off, the entire value of the home is the equity

However, rules relating to home equity line of credit change depending on whether a home has a mortgage (or not) and on the type of loan you plan to apply for.

We think that the lender you were talking to will give you a home equity line of credit of a certain amount given the value of the home when you have a mortgage but will give you a lower amount if there is no mortgage on the home. We can’t speak to why lenders make up the rules this way, but sometimes these rules can be better for a borrower when they have a mortgage than when they don’t.

Let’s use an example of a lender and a home valued at $300,000 with a $50,000 mortgage. That lender may have a rule where the bank can give a home equity line of credit of up to 70 percent of the value of the home less any mortgage. This particular lender may be willing to give a homeowner a home equity line of credit of $160,000. The same lender may have a rule that states that the lender can only give a home equity line of credit of up to 50 percent of the value of the home if there is no mortgage. So, in this second scenario, the home equity line of credit could be at most $150,000.

Remember, we’re not using actual rules but are giving you an example of how some rules can work. Talk to the lender and see what terms they’re offering you for the home equity line of credit or home equity loan now, compare those terms with other lenders and see what works for you.

That lender may be right and today might be a good time for you to take out the loan. But if the rules don’t matter because the loan amount you’d want would be less than what they could give you today or in the future once you are mortgage-free, it may not matter when you take out the loan. But what should matter are the costs and fees in obtaining whatever loan you choose, and the interest rate that loan carries.  

It sounds to us as though the lender is trying to get you to sign on the dotted line as quickly as possible (and maybe he’ll get a bigger bonus if he makes quota by month’s end). But what you should do is shop around and find a lender you can trust to give you the deal that’s right for your personal situation.

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