There is no doubt that a home equity loan has a number of important benefits. But there are also a lot of lenders out there who offer home equity loans. How can you decide which home equity loan is best for you?
Essential criteria
If you are getting a home equity loan for the first time, you should make a list of the most important questions you need to ask each lender. The answers to these questions will give you a good starting point for making comparisons.
How much is the rate of interest? This is very important to know. The interest rate will tell you how much you have to pay each month. You should also find out if the interest rate is fixed or if it changes over time. A fixed rate means that the monthly payments will stay the same, while an adjustable rate means that the rates will change based on how the market is doing.
When will rates change if they are variable? If the interest rate on your home equity loan is adjustable, you need to know three things: when the rate will change (that is, under what circumstances), how often the rate will change, and by how much the rate will change on average.
What is the APR, or the Annual Percentage Rate? The amount you have to pay each year will be based on the APR of the home equity loan.
How many points do I need to pay? Most of the time, a home equity loan's points are closely tied to its interest rate. The interest rate goes down as the number of points paid goes up.
What are the fees that need to be paid? There are many different types of fees that come with a home equity loan, such as an appraisal fee, broker fee, document preparation fee, funding or lender fee, application or loan processing fee, underwriting or origination fee, etc. If you know what the fees are for the home equity loan, you'll know what to look for in the monthly statements. Plus, it will help you plan and handle your money better.
How long does payment take? The amount of time you have to pay off your home equity loan will depend a lot on how your finances are doing right now. With a longer term, you can spread out your payments more and save more money.
Is there a one-time, lump-sum payment? Most of the time, you only have to pay the interest on a home equity loan every month. Then, at the end of the time you have to pay back the loan, you will have to pay the full principal amount. This is also called a "balloon payment," and when the time comes, it can add a lot to your costs. To avoid this, you should ask the lender of your home equity loan if there is a condition like this. This will help you be ready for a money crisis in the future.
