Rates have historically never been better, so nowadays the temptation to borrow against your home equity is very strong. However, many homeowners unknowingly make costly mistakes.

Here are the top 5 mistakes people make when applying for a home equity loan.

Mistake 1 – Not Knowing The Difference between a Home Equity Loan and a Home Equity Line of Credit

A home equity loan is a one-time transaction that allows you to draw out all the funds available.

A home equity line of credit (HELOC) is open; you can choose a small initial advance against the full amount of the line; then reuse the line of credit as often as you want during the period that the line is open. Your monthly payment is based on the outstanding balance.

A general rule of thumb is: use a home equity loan when you need all the money up front; such as cash for home improvements, debt consolidation, or a large one-time purchase.

If you need ongoing access to cash and revolving credit a HELOC may be your best choice.

Mistake 2 – Taking a Home Equity Loan When You Plan on Refinancing Your First Mortgage

Many mortgage companies look at the combined loan amounts (i.e., the sum of the first and second loans) even when you are refinancing only your first loan. If you plan on refinancing your first loan the lender may require you to pay off both your first and second mortgages; or close your home equity line completely.

Check with your mortgage company to see if having a second loan will cause your refinance to be turned down.

Mistake 3 – Not Knowing The Hidden Costs

If you feel you must take out a home equity loan or open a line of credit it is important to know ALL the costs. With any loan secured against your property there can be hefty insurance costs, appraisals and other fees that can cut into your loan amount.

Mistake 4 – Only Applying at Your Current Bank

Many consumers apply for their home equity loan from their home bank. This can be a costly mistake.

As in any other type of loan, be sure to shop around for the best deal. Your current bank may not be able to give you the best interest rate or the best terms.

Think twice before deciding to use your local bank; you may find that there is another lender out there that can offer you a substantially more attractive loan program.

Mistake 5 – Not Checking Your Credit First

As in any type of loan, it is imperative that you get the best rates and terms. However, if you have credit problems it will seriously affect your ability to qualify.

In fact, if your credit is not the greatest you may have no choice but to use alternative lenders specializing in hard to place loans. The solution: Make sure you go with the bank or lender that provides the best rates for your type of credit whether good or bad.

There you have it. Avoid these 5 mistakes and you could save yourself hundreds, if not thousands of dollars when you get a home equity loan.

Strategic Capital Network is a licensed mortgage brokerage specializing in helping credit challenged homeowners qualify for home equity loans.