Home Equity Loans
March 30th, 2010 Subscribe To Our Feed
The equity of your house can be a great source of cash, especially if you have an immediate need for it, through what is called a Home Equity Loan. However, before you plunge right into the process of drawing a loan out of the equity of your property you need to understand different aspects of this loan as they may be easy to acquire, but a nightmare of not done correctly.
Here are some aspects of home equity loan that you need to consider:
Points
Most lenders charge a part of the loan, called ‘points’ for commissions for themselves and for their sub-agents. Actually such points vary from little to exorbitant; it all depends on the company and the type of loan. If you are charged 1 point, this would mean 1 percent of the loan. And so 1 percent of a 100,000 dollar loan is an up front charge of 1000 dollars. So shop around to find the best deal as there are lenders who do not charge any points at all.
Loan Interest Rate Terms
Is the loan a fixed or variable rate type of loan? If it is a fixed loan, then you do not have to worry about external forces such as economic situations directly affecting your interest rate. But on the other hand, if you have a variable rate loan, you could start out with a great interest rate that could become costly over time as your payment will increase as the interest rate increases. Check to see if you can switch from variable to fixed. That way if you see interest rates rising, you could always change over to the fixed rate.
Pre-Payment Penalties
Lenders tend to charge a penalty for paying off your loans early. You have to be aware that indeed, many second time loans have pre-payment penalties. Pre-payment penalties lock you into paying off your loan over its entire duration, and if you still decide on paying it off early, the lending company will add a penalty that could be costly depending on the size of the loan and how much time is remaining on the loan.
Late Payment Penalties
Does a home equity loan’s interest rate go up with late payments? With many lenders, with delinquent payment, penalties usually follow. More so, there sometimes is a clause in the loan, on default interest rate increase, which raises automatically the loan rates when payments are late. This can actually be costly for the borrower.
Insurance
You have to check if the home equity loan that you are prospecting has insurance costs hidden somewhere, a cost that you definitely do not want. Whenever you get a loan, you can take in corresponding credit insurance. You can have credit life insurance, which takes care of your loan in the event that you die. However, if in the case of a home equity loan, if you feel that insurance is just an added cost, then by all means avoid the lender that requires you to pay for them.
Doing due diligence upfront and asking questions to ensure you understand the different aspects of the home equity loan is a must. The better understanding you have before you sign on the line will go a far way to ensure there are no disappointing surprises later on.
