A home equity loan can be a great quick cash source when used correctly, but some borrowers fall into the pitfall of not being able to pay it back and end up loosing their home. To not fall into this category you should follow some simple guidelines of when it is not appropriate to use a home equity loan as a quick cash source. Those are:

• For big ticket purchases
• For business or investments
• For living expenses
• When the payment is too much
• When unfavorable terms are involved
• When your loan includes a balloon payment
• When the deal is shady

Each of these has their own pitfalls and if you decide to take out a loan even though one of these conditions exists, you may be setting yourself up for disaster. Let's take a closer look at each of these scenarios and why you should not use a home equity loan as a quick cash source for them.

For Big Ticket Purchases

Taking out a home equity loan to purchase a car, boat, or dream vacation may seem like a good idea at the time because the interest on this type of loan is tax deductible, but luxury items depreciate in value quickly and you are stuck paying on an item that is no longer worth what you are paying. In the mean time, you are putting your home on the line to make these purchases. There are more appropriate loans available for these types of purchases that lower your risk significantly with the same interest rates you can get on a home equity loan. Instead of taking out a home equity loan and putting your home on the line for big ticket purchases, try using your savings, tapping into your 401k, a signature loan or use specific loan, like a car loan if you are purchasing a vehicle. When you use a home equity loan to purchase luxury and big ticket items, you are unequivocally disarming yourself against creditors. If you eventually default on your loan or have to declare bankruptcy, you cannot walk away from a loan secured by your home as you can with unsecured loans. You are stuck with paying it and you may loose your home in foreclosure without seeing any of that money come back to you.

For Business or Investments

Your lender will always ask you what your home equity loan will be used for before they approve it. Most lenders will not approve a home equity loan that is used for starting a business or investing in real estate or the stock market. They consider this type of use of a home equity loan very high risk, and therefore will generally not approve it. Take a hint from lenders and realize that putting your home up to secure a loan that is going to be used for business investment is not a good idea. It is high risk for you too. If your business or investment should fail, not only will you be loosing your business, but you will more than likely loose your home as well.

For Living Expenses

If you find yourself spending more than you are earning, taking out a home equity loan to cover your expenses may look like an attractive option, but it is by no means a good idea. If you are putting your home in jeopardy so you can continue to live the lifestyle you currently do, then your lifestyle isn't going to last long, and neither will your ownership of your home. Try instead to budget, consolidate your debts, and cut back on your spending habits. Instead of giving you relief in this type of situation, taking out a home equity loan or line of credit will only put more pressure on your finances.

When the Payment is Too Much

If you can't afford to pay the monthly payment on your home equity loan, you shouldn't even consider taking it out. Loosing your home in the future because you default on your home equity loan is not worth a little extra cash today. Take a good look at your circumstances before you take out a home equity loan. If you are in danger of loosing your job, having a significant loss of income, or adding to your debt, taking out a home equity loan will put too much financial strain on you. The payment may not be too much now, but if your circumstances change, a home equity loan can have a significant impact on your finances and you don't want to loose your home on top of other debilitating circumstances.

When Unfavorable Terms are Involved

Lenders are trying to make the biggest profit possible from your home equity loan, and as a result they may hit you with unfavorable terms. While not all unfavorable terms can be avoided when taking out a home equity loan, there are three that you should not be involved with. They are: a pre-payment penalty, credit insurance, and interest rate increase on late payments.

If you are able to pay your loan off before it is due, you should. You decrease the amount of interest you pay and you're no longer carrying the loan, which is always good news. However, some lenders will penalize you for paying your loan off early so they can make up the loss on the profits they would have gained if you had carried the loan through its term. A pre-payment penalty is commonly 10% of the total amount you borrowed. This can be extremely costly to you. If you don't think you'll pay your loan off early, then you may accept a pre-payment penalty term in your loan contract, but if you sell your home before the loan comes to term or re-finance your loan, you will have to pay the penalty. Be sure to see what your options are if the pre-payment penalty were to be removed from your loan terms.

Your lender may include credit insurance on your loan which significantly increases the amount you will pay. Be aware that credit insurance is optional, and expensive. Credit insurance covers your payments in case of unemployment, disability, or loss of life, but it is always more expensive than taking out a normal insurance policy through your employment which will also cover those situations. If you think you need credit insurance, going through your lender is probably not the best option of getting it. Besides getting a policy through your employment, there are insurance providers that can provide you with a much better policy than you can get through your lender. Be sure to comparison shop before you buy.

If you miss a payment or are late, your lender may include a term in your loan agreement that will significantly increase the interest rate on the rest of your loan. The increased interest rate can make your loan much more expensive and may cause you to default, in which case you will loose your home. There are lenders who will not include this term in your contract, but if you must go with one that does, find out exactly what will trigger the increase in interest rate and try at all costs to avoid it.

When Your Loan Includes a Balloon Payment

Occasionally you can get a better interest rate or a significant decrease in closing costs if you accept a balloon payment as part of your terms. This is a very bad idea as a balloon payment is where you pay a lump sum of money at the end of the loan because your loan wasn't amortized over its life to cover the entire principal amount borrowed. When the loan comes due, you have to make up the difference. This often results in re-financing your loan, which can be expensive, or in the sell of your home because you can't come up with the money to pay the balloon payment. Stay away from this type of loan deal at all costs. If you need money now, what's going to happen when the loan comes due and you need a large amount of money to cover it? You are just putting yourself in a spiral of debt.

When the Deal is Shady

There are lenders out there who will not deal with you honestly. Protect yourself from abusive lending practices that can ruin your credit and cost you your home. If any of the following occur, get out of the deal as quickly as possible:

• Your lender tells you to falsify information on your loan application so it is easier to approve.
• Your lender pressures you into applying for more money than you need.
• Your lender sets up a monthly payment you cannot afford.
• Your lender doesn't provide loan disclosure documents or tells you that you don't need to read them.
• Your lender tells you to sign blank forms and that they will fill them in later.
• Your lender won't give you copies of your loan documents that you signed.

If any of these situations occur you have the right to cancel your loan within three days of taking it out. If you do decide to rescind your loan, be sure to do so in writing and have it delivered before midnight on the third day.