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Accessing your home equity? Here's what experts say to avoid doing

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If you want to borrow against your home's equity, there are a few things you should avoid doing before you apply, experts say. Getty Images

Interest rates are high thanks to the Federal Reserve's ongoing fight against inflation. While that's nice for savings accounts, it's not so great if you need to borrow money. 

In fact, the average credit card rate right now is over 21%. Fortunately, not all financial products have rates that high. Home equity loans and home equity lines of credit (HELOCs), for example, offer rates that are much lower on average — typically between 7 and 10%. 

If you own a home, these home equity products could be smart ways to get the cash you need without racking up sky-high interest costs. But if you're considering taking one out this year, be sure to avoid these four mistakes before applying.

Find out what today's top home equity loan rates are here.

Accessing your home equity? Here's what experts say to avoid doing

Here's what experts say to avoid if you're planning to borrow from your home's equity:

Don't apply for other credit

Never apply for a new credit card or loan if you're hoping to get a home equity loan or HELOC soon. For one, doing so will result in a hard credit inquiry.

"Credit inquiries lower credit scores," says Rebecca Franco, a financial counselor at Family Trust Credit Union. "A lower credit score could then affect the rate you qualify for and risk your chances of approval by shifting your debt-to-income ratio."

Your debt-to-income ratio (DTI) is how much of your monthly income your debt payments take up. For home equity loans and HELOCs, you'll usually need a DTI of 43% or lower. If you open a new account and take on more debt, it could put your DTI past this threshold.

Having a high DTI could also "substantially reduce the amount of the HELOC you can apply for," says Jeremy Schachter, branch manager at Fairway Independent Mortgage.

Compare your home equity borrowing options now.

Don't miss payments

Missing payments — on your mortgage, on your electric bill, or anything, really — is a big no-no, too, experts say. Mark Charnet, founder of American Prosperity Group, even calls it the No. 1 mistake to avoid.

"Do not have any late or missing payments on your file or credit history," Charnet says. "Pay your primary mortgage payment on time and even a bit more than the minimum asked, as it makes you appear to be a stronger applicant."

You should also put your other monthly debts and bills on autopay to ensure you're not late. Late payments can reduce your credit score and make you look like a riskier borrower. This can mean a higher interest rate on your home equity loan or HELOC or getting denied altogether. (You'll usually need at least a 620 score to get one of these loans, though some lenders may require higher.)

Don't go on a spending spree

You shouldn't make any big purchases or rack up credit card debt, either. Doing so could impact your DTI and credit score and make you look like a less responsible borrower.

"Banks can access your current credit as well as doing something called a refresh credit where they look at current balances and payments since you applied," Schachter says. "If you had a zero balance on a credit card and then have $5,000 balance, this could decrease your chances for a loan approval."

If possible, keep your spending low — or even cut some corners — in the time leading up to your loan application. This will pad your bank account and make your finances seem more solid. 

"Lenders like to lend money to people who can document they do not actually need the funds, so make yourself look less needy in any way possible," Charnet says.

Don't leave your job

Finally, keep your income consistent. Lenders need to see that you will have the money to make your new payments — both now and in the future.

"Definitely don't leave your job," says Neil Christiansen, branch manager at Churchill Mortgage. "And do whatever you can to avoid losing it."

If you get paid by the hour, make sure you don't cut back on work hours in the time leading up to your application. You might also consider picking up extra shifts to increase your income. Even a slight bump could make it easier to qualify. 

The bottom line

If getting a home equity loan or HELOC is a goal for this year, start preparing today. Work on reducing your debts, and keep your spending in check. You can also pull your credit score and work to increase it if it's less than ideal, HIgher credit scores make it easier to qualify and typically lead to lower interest rates. 

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