The house needs a new roof, you'd love to finish that playroom for the kids, and the family is clamoring for a decent vacation. Looks like a home equity loan is just what the financial doctor ordered!

Wait. Are you sure you're getting the most cost-effective, competitive financing available? What's this loan really going to cost -- including closing costs and other lender' fees? And are you sure there aren't one or more clauses buried in the mortgage document that could make repayments tough if not potentially impossible to handle?

Before you sign on the dotted line, make sure you've asked the lender the following seventeen questions, backed by your thorough investigation of the mortgage documents or review from your own legal counsel.

If you're still information gathering, considering loan programs from various lenders, jot down your findings side-by-side to compare answers to the following questions:

1. What are the monthly payments? No matter the amount of payment you qualify for, if it isn't within your financial and emotional comfort zone, don't take it!

2. What is the Annual Percentage Rate (APR)? If you've previously obtained a first mortgage loan, the APR was the cost of credit expressed as a yearly rate including discount points and various lender fees. Not so with equity lines of credit. By federal law, these second mortgages only reflect the interest or note rate charged on the loan, exclusive of other loan fees. While the lender will be glad to initially share the APR with you, be sure to double-check the APR quoted on the Good Faith Estimate provided to you by the lender within three business days of applying for the loan.

3. What is the interest rate? As shown by the answer to the previous APR question, it might be possible for a loan with a lower interest or "note" rate to actually cost more overall due to hefty closing costs, points, etc. not disclosed as part of the annual percentage rate. That's why it's important to evaluate all costs and terms, not settle for a loan solely based on its interest rate.

4. Will the interest rate change? Equity lines of credit are notorious for initially coaxing you into a loan with a discounted "teaser" rate, but later adjusts to a rate higher than many other types of second mortgages. If rate changes will occur, when will they begin, how often will they occur, and what will the maximum rate and corresponding payment be? If you can't live with the "worst-case scenario" payment quoted you, don't take the loan!

5. What are the points you'll have to pay? Discount points are equal to one percent of the loan amount and are used to increase the lender's yield or profit on the loan. It pays to shop stringently here since points can vary widely from loan to loan and lender to lender.

6. What are the fees involved? Including: application or loan processing fee; origination/underwriting fee; lender or funding fee; appraisal fee; document prep and recording fees; loan broker fees; other fees (i.e. overnight mail charges, etc.) Since virtually all lender fees are negotiable (even though the lender would prefer you not know it!) be sure to ask which if these fees can be waived or at least reduced.

7. Are any of the application fees refundable if you don't get the loan? If so, under what circumstances?

8. How many years will you have to repay the loan? Are there any prepayment penalties for paying off the loan in advance? The latter is particularly important if you need the funds for only a short period of time since pre-payment penalties can range from hundreds to thousands of dollars in extra cost.

9. Is this an installment loan or an equity line of credit? Most installment loans are made in one lump sum to the borrower. Comparatively, lines of credit allow you to borrow what you need, when you need it up to your maximum approved loan amount. If you've experienced problems in the past managing debt or repaying credit, a flat-sum installment loan (a traditional second mortgage) could be preferable to an open-ended equity line of credit that could fuel your temptation to purchase disposable/depreciable goods you don't really need.

10. Is there a balloon payment? If so, approximately how much and when? If a partial or total payment in full is required before the monthly payments amortize/pay off the loan, how likely is it that you could raise the capital to meet the obligation given your current financial situation?

11. What are the total closing costs involved? This would include impounds and pre-paid amounts for property taxes, insurance, credit life insurance, etc.

12. If a mortgage broker is involved, how will he or she be paid? Make sure you determine if any mortgage broker involved will be compensated outside of closing (shown as "Paid Outside of Closing---POC" on the closing statement) or if these fees are added back into the loan.

13. What is the penalty for late or missed payments? Be sure to determine if a grace period (i.e. 15 days from due date) is offered.

14. Does the loan include optional credit insurance? This insurance pays off the debt should you become disabled or die. It's important to note that optional credit insurance cannot be part of loan criteria mandated by the lender.

15. If you do want optional credit insurance, can you pay for it monthly instead of financing the payments into your loan? Paying the premiums outside of the loan could sidestep interest that would accrue if wrapped into the loan.

16. Did you receive a copy of your credit score? Ask the lender prior to closing to share your credit score and related information with you. While the lender won't give you a hard copy of your credit report, your credit score can serve as a benchmark of your credit worthiness and assist you in further establishing/preserving your credit.

17. Final question and the real bottom line: Given the following information, do you feel financially and mentally capable of handling this loan?

Once the ink dries on the closing papers, there's little if anything you can do to repair possible financial missteps taken with the loan. Your best tack is to use the preceding questions as a template to ensure that you don't overpay and/or over-leverage into a loan that could potentially cost you your equity and (gulp) your home.

For more articles by Julie Garton-Good, please press here.

Published: April 13, 2001

Use of this article without permission is a violation of federal copyright laws.

Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.