Here are nine ways to make sure you've taken steps to protect your home and equity:
- Take a look around. Costs can be very different! Get in touch with lenders like banks, savings and loans, credit unions, and mortgage companies. Ask each lender about the best loan you can get that meets your needs.
- Look at the yearly percentage rate (APR). When shopping for a loan, this APR is the most important thing to compare. This includes the interest rate, points (one point is equal to one percent of the loan amount), mortgage broker fees, and other credit charges.
The amount the lender wants the borrower to pay is given as an annual rate. Most of the time, the APR tells you how much your loan will cost. Find out if the APR will change.
- Find out how many points and other fees you'll have to pay. If you refinance or pay off the loan early, you might not be able to get your money back. If you want to refinance, you may have to pay more points. Points are usually paid for in cash at the end of the loan, but they can also be added to the loan. If you pay for the points with your loan, you will have to pay more interest and the total cost of your loan will go up.
- Payment every month. How much does it all cost? Will it stay the same or get different?
- How long the loan is for. How long will you pay the loan back? If you get a home equity loan to pay off credit card debt and other short-term loans, don't forget that the new loan may tie you up for a longer time.
Will there be a "balloon payment" at the end? A "balloon payment" is a large payment that is usually due at the end of a loan, after a series of smaller payments each month. Even though the balloon payment is due, you must find the money to pay it. If you can't, you might need another loan, which means you'll have to pay new closing costs, points, and fees.
- Is there a fee for paying off the loan early? If you pay off the loan early by refinancing or selling your home, you may have to pay a penalty. If you have a high-interest loan, prepayment penalties may make it too expensive to get out of the loan. This could make you feel like you have to keep the loan. Try to get this penalty taken out of your loan contract.
- If you don't pay back the loan on time, does the interest rate go up? If you miss a payment or pay late, you may have to pay a higher interest rate for the rest of the loan. This is called a "modified interest rate provision." Try to work out a deal so that this clause is taken out of your loan agreement.
- Was there a fee for any kind of voluntary credit insurance, like disability, unemployment, or credit life, that came with the loan? Will the loan cover the cost of the insurance premiums? And if so, will you have to pay more interest and points, which will make the whole loan cost more? How much less would your monthly payment be if you didn't have credit insurance? Does the insurance cover the full loan amount and the whole time you have the loan? When deciding to buy credit insurance on your own,
if you get insurance from a lender, think about whether you really need it and talk to other insurance companies about their rates.
