Pittsfield, MA -- (SBWIRE) -- 04/24/2013 -- People shouldn't be swayed by slogans like “dig into your plentiful home equity” because a home equity loan doesn't work like a surplus account. Real-Estate-Yogi would like to offer some consideration for those offered the home equity loan option:

- Evaluating the Loan
- Compared to a Federal Education Loan in Interest and Fees
- Risks of Home Equity Loans

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Evaluating the Loan

Home equity or line of credit loans are freely marketed because they are convenient for banks, but for those with doubts, it certainly should be evaluated.

Interest rates are higher on home equity than federal loans, but lower than most private education loans. Those paying for private education should consider home equity or line of credit, while most will be advised to stick to federal education loans.

Compared to a Federal Education Loan in Interest and Fees

Home equity loans are more expensive than Federal Education loans. They also have fees, which although lower than private education loans, are still higher than federal education loans. For a true comparison, fees must be calculated with the interest rate. Since fees are essentially interest paid up front, some will want lower fees to pay off the loan before the end of the term.

Risks of Home Equity Loans

One considerable home equity loan risk is reduced financial aid eligibility or award. The loan amount gets factored into the need analysis formula. A line of credit is not factored because it has no proceeds.

Loan payments are affected by the variability of interest rates. With variable interest, payments increase with interest rate, while fixed interest rates do not. Line of Credit Home equity loans have fixed interest rates while home equity loans have variable interest rates.

A risk is owing more than the value of a home. This can happen when more is borrowed than the current worth of the home, and even with less than the value of the home, with changes in the housing market causing the value of the home to drop. This makes the market more difficult for sellers.

The federal education loan has workable repayment options. These include graduated repayment and income contingent repayment. It may be possible that private education loans have flexible repayment terms too.

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