How to Shop for the Best Interest Rates on Home Equity Loans and Credit Lines
Home equity loans, also known as second mortgages, are popular ways for home owners to draw equity from their homes for various reasons. There are two types of second mortgages: the home equity line of credit (HELOC) which is a variable rate loan, and a closed-end home equity installment loans (HEIL) which is generally a fixed rate loan with fixed monthly payments.
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Home equity lines of credit typically offer interest-only payment options during the draw period (typically the first 5 - 10 years) that turns into a regular amortizing adjustable rate mortgage (ARM) during the repayment period. While there's typically no pre-payment penalty, many HELOCs do charge close out fees--fees charged for paying off and closing the line early (typically within the first 3 - 5 years). Closed-end HEILs are lump-sum loans that require the borrower to immediately start making monthly amortizing principal and interest payments on the loan. They typically do not have pre-payment penalties or close out fees.
Before you start shopping for a loan, get answers to these questions to determine the best loan for you:
What is the purpose of the loan? (debt consolidation, home improvements, finance college, etc.)
How long is the term of the closed-end loan? The loan term is the period of time from the date of disbursal to the final due date of the loan.
What is the life span of a line of credit? - What is the life span of the closed-end home equity installment loan?
How large a line of credit do you qualify for? - How large an equity loan do you qualify for?
Is my line of credit renewable when the life of the loan expires? If the answer is yes, you may still be able to draw from the line. Otherwise, you'll have to start paying back the loan, and you can no longer draw from the line.
What type of interest rates are offered? (fixed, adjustable, interest only)
Do I have to use my credit line right away? (If you're opening a HELOC for future or emergency needs, find a line of credit one that doesn't require a minimum draw at closing.)
Find lenders and brokers that offer good faith estimates and disclosures in a timely manner. Find out the total cost of the loan--the annual percentage rate (APR), which includes the interest rate plus loans fees, points and other costs associated with the loan. The Federal Trade Commission (FTC) suggests that before you sign, read the loan papers carefully. And, if the loan isn't what you expected or wanted, don't sign the papers.
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