One of the
most important costs of your home equity loan is your
interest rate. This one factor determines how much your
monthly payments will be, and how much you will be paying
over time. When shopping for your loan, make sure you
understand what interest rates are, and how they work.
Annual Percentage Rate (APR)
APR is not the interest rate on a loan. It is a calculated
figure that includes the interest rate along with other
associated fees. This figure is affected greatly by the
interest rate however, and it is the best way to determine
which lender has the better deal.
If you are comparing APRs between multiple lenders, be
sure that all the terms are the same. Even though they
might offer the same APR, one loan term could be 5 years
while the other was calculated for 10 years. The longer
the term; the more money you will be paying in the long
run.
Variable Rates
Variable interest rates are rates that do not stay the
same throughout the term of the loan. You should be careful
when dealing with this type of interest rate. If it changes
your monthly payments and APR can go up.
Variable Rates are generally lower than the prime rate
at first. Borrowers are attracted to this rate but it
is scheduled change after a certain amount of time. The
term before a variable rate can change, is dependent on
lender (generally every 6 months to 1 year).
There are usually restrictions as to how much the rate
can increase each time. Make sure you know exactly what
can affect your variable rate and how. You should also
calculate the rate changes to see how it will affect your
monthly payments, and to see if you will be able to afford
it.
Introductory Rates
An introductory rate is usually associated with home equity
credit lines. These rates are temporary interest rates
offered as a kind of signing bonus to the borrower. The
introductory term generally lasts between 6 months to
1 year and can increase dramatically at that time.
Lenders will offer introductory rates several points
lower than the prime rate in order to get the deal. To
avoid not being able to afford you loan payments you should
know exactly what interest rate will follow the introductory
rate.
You should find out if it is a fixed or variable rate,
and how much it will increase your monthly payments. There
are some provisions in the loan contract that might prematurely
end your introductory rate period if you miss or make
a late payment.
Fixed Rates
A fixed interest rate is the safest way to go when taking
out your home equity loan. This rate does not change in
most cases. The important thing, is to find a fixed rate
that is suitable for you. Even with fixed rates, a lender
might have a provisions in the loan contract to increase
the rate if you violate certain policies. Be sure to look
for these terms and negotiate to have them removed.
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