Some people find it hard to understand how home equity interest rates work. In fact, if a homeowner takes out the wrong kind of loan, they can quickly get into financial trouble. In the current state of the housing market, it is smart to know how interest rates work and how much they will cost you over the life of your loan.
The good news is that homeowners can use interest rates to their advantage when looking for home equity loans. APR is one of the most important terms that are used to talk about home equity loans. Annual Percentage Rate is what APR stands for.
It's important to know that you can't compare the APR of a home equity line of credit to that of a home equity loan. These are two different kinds of loans that work in different ways.
Homeowners should also know that lenders often use an introductory rate to get new business. If your loan has an introductory rate, make sure you know what the real rate will be after the first phase.
The standard interest rate and the annual percentage rate are not the same thing. The interest rate on a home equity loan doesn't tell you how much the loan will really cost because it doesn't take into account fees and points. When comparing two home equity loans, the APR is much more helpful because it accurately shows how much the loan will cost over a year. It will also show the interest rate and any fees or points that need to be paid.
When comparing APRs, make sure that the terms and conditions of each loan are the same. The APR will change if the terms and conditions are different. For example, if one of the loans you are looking at has a longer payment term, a balloon payment, and some kind of pre-payment penalty, it doesn't make sense to compare its APR to another home equity loan that doesn't have these conditions.
The difference between home equity loans and lines of credit is another thing that can be hard to understand about home equity loans. Consumers should compare APRs on home equity loans, but they should know that they can't compare this to lines of credit loans. This is because the APR for a home equity loan includes the interest rate and all fees paid during the loan, while the APR for a home equity line of credit only includes the interest rate. In other words, a line of credit's fees are not taken into account when figuring out the APR. To avoid confusion, consumers should only compare like to like; the APR of a home equity credit line loan should only be compared to the APR of another home equity line of credit that contains similar terms.
As we've already said, home equity lines of credit may start with a low interest rate to catch your eye. These first-time rates are also called introductory rates, teaser rates, or discounted rates. It's important to know ahead of time how long the rate will be in effect and how much more interest you'll have to pay after it ends. In some cases, the extra interest can be a big deal, in which case you might want to keep looking.
