Home Equity Borrowing Tips
There are some things to consider when you shop for a Home Equity Loan or Credit Line:
Interest Rate
The lower, the better. You can lower your interest rate by offering to pay more discount points up front.
Closing Costs
Advance charges associated with taking a mortgage. These include points (one percent of the loan amount and discount points.
Effective Interest Rate
The amount of interest you’re actually paying when you figure in the closing cost points.
Monthly Payments
Anticipate your future financial needs, such as putting a child through college or your own retirement. Can you still afford the payments? Our Home Equity Loan Payment Calculator can help you figure what they will be.
Prepayment Penalty
Make sure there’s no penalty if you choose to pay off the loan early.
Special Promotional Introductory Rates
These reduce the first few months of payments. In some cases, however, the subsequent payments reflect a higher effective interest rate than you would have paid had you gone with higher, non-introductory rates. Do your research carefully!
“Interest-Only” Payment Option
This is, in effect, a balloon loan. You will be expected to pay off the entire amount of the principal at the end of the term – or refinance the loan.
Margin
The margin is the difference between the interest rate of the index your Adjustable Rate Mortgage (ARM) is pegged to and the amount of interest you pay. The higher the margin, the more you pay.
Payment Limits
Payment limits protect you. They limit the dollar amount your payment can increase from one adjustment to the next. The payment limit helps ensure that you won’t be hit too hard by a sudden leap in interest. The tighter your budget, the more you want a low payment limit.
Floor
This is the lowest the interest rate can go. Floors protect the bank by guaranteeing them a minimum return.
Index
If the index your ARM is pegged to is at 3%, your interest will be a few points higher and will change when that index does. The current rate for one-year Treasury securities is the index most banks peg their ARM to, but other indexes are also used. A low index doesn’t always mean a low interest rate, because the interest rate also depends on the banks’ margin between the index and rated charged to you.
Interest Rate Trend
Research interest rates over the past two years. If they have been going up, you’ll probably have higher payments in the near future. If they are going down, your payments should also decrease.
Adjustment Period
A short adjustment period means you start paying more interest as soon as the rates rise. The longer the adjustment period, the longer you’ll continue to pay at a lower rate, which saves you money every month. One year is standard for most ARM’s. Beware of shorter periods.
Caps
These are the highest rates the interest can reach with each adjustment and over the life of the mortgage. Caps protect you from paying sky-high interest. Look for a low cap. Two points per year and six points for the life of the loan is standard. And make sure the caps apply to all the adjustments.