Home Equity Loan Terms



Home Loan Gotcha's!

As with any contract, there are terms that you should be aware of. Some of these terms you should run from completely. If you are not careful, you might be charged ridiculous fees or suffer interest rate increases for late payments. Here are a few choice terms to look out for:

Interest Rate Increase
Some loan contracts state that in the event there is a late or missed payment, the interest rate for the life of your loan will increase. This could potentially cost you thousands in the long run. This type of provision should be absolutely avoided. Try to have it removed from the contract altogether or find a home equity lender that will exclude it.

If you are unable to get away from this provision, try to have the lender set the rate increase to something manageable. Either way, before you accept the loan you should be fully aware of what incidents can trigger the interest rate increase.

Pre-payment Penalties
This kind of provision, some might consider to be ridiculous. A pre-paid penalty is incurred when a loan is paid off before its scheduled pay-off date. One might wonder why this provision exist in some contracts. This is becuase some lenders will only make money off the interest accumulated over time. So, to have a loan paid off early cuts into their calculated earnings.

You should try to have this provision removed from your loan contract. If the mortgage lender agrees to this, they might attempt to raise the interest rate to compensate for the potential loss. If they do not increase the interest rate, there is a possibility your closing cost will increase.

If you have a choice between the two, it is best to go with an increased closing cost because it is a one time fee. Higher interest rates will usually accumulate over time. The standard pre-payment penalty is somewhere around 10%, but it may differ in each case.

Also, be aware that selling your house early or refinancing can both be considered pre-payment of a loan. If you will possibly be moving during the term of your loan, the provision should definitely be removed from your loan contract.

Insurance on your loan pays off the loan in the event that a you are unable to do so. This coverage only protects you in specific cases such as death or dismemberment. This is an optional plan and it should be carefully considered before it is accepted.

Keep in mind that the cost of a life insurance or alternative coverage could work out to be a cheaper solution.If you do decide to keep the credit insurance option, be sure you understand what situations are covered.

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