Shopping for the best loan with equity is a bit more complicated than shopping for groceries. There are payment terms to consider and the interest rates can be charged for a potentially long period of time. There are different interest structures available for borrowers, namely: fixed, variable and adjustable. Whether you take out a first mortgage, a home equity loan or a home equity credit line (HELOC), the rates are constantly changing. That means that your first step in landing the best deal is to look for competitive rates in the market.
A second mortgage (another way to describe equity financing) works on the same basis as a first mortgage, allowing homeowners to borrow a lump sum and then repay it through monthly repayments. Home equity mortgages (see Home Equity loans: what you need to know ) are often used to finance renovations or house upgrades, consolidate bills or make a down payment on another investment.
Given the range of interest structures, it is crucial to do your homework. You could look inside yourself, hire a mortgage broker to do the research for you, or simply use an oBunterine search tool (such as E-LOAN or Lending Tree) that will follow the universe of lenders and their current rates. . Whatever your search mode is to find your best option, it is important to understand how interest rates work to determine which loan type and rate structure meet your needs.
Interest versus APR
The difference between these two cannot be expensive for you. There are many costs associated with taking out a mortgage (more than interest). The interest rate is used to calculate a mortgage payment for a certain loan amount and repayment period. However, it is not really clear how much the loan will actually cost.
While i latest interest rate cost (or the percentage of the loan amount) shows that you pay each year, this gives no other fees or costs that you may also have to pay.
An APR or an annual percentage (see APR and APY: Why your bank hopes you can’t see the difference ) not only shows the interest rate, but also points, brokerage and handling costs and other costs that you have to pay to obtain a loan. For that reason, the APR is usually higher than the interest rate and offers a much more realistic picture of what the loan will cost annually. (Note that the APR for a home equity line of credit does not cover fees, according to the Federal Trade Commission.)
Fixed interest rates
Approximately 90% of US mortgages are fixed-rate loans. In fact, the 30-year fixed-rate mortgage is the most popular product of the American homebuyer. Why? It is a safe bet because the payment for a loan with a fixed interest or shares will never change; the interest is fixed for the duration of the loan. This means that borrowers always know where they stand in their repayments: the monthly principal and interest payment remain constant throughout the 30-year (or other) borrowing period, protecting borrowers from rate increases and potential “payment shocks”. “A loan with equity with a fixed interest rate offers comparable protection.
Depending on the financial circumstances of a homeowner, the certainty associated with fixed repayments can be much greater than the potential savings that a variable interest rate structure can offer.
Variable interest rates
Variable rates can be very attractive, especially when they are lower than the fixed rates at the time of borrowing. However, unlike the fixed-income home loan, the variable interest rate changes according to fluctuations in the market rate, so that you never know exactly what your repayments will likely be, since they are also subject to change. If interest rates remain low, this may be beneficial to the borrower, but “going variable” means a high financial risk if interest rates suddenly rise.
Rates of teasers
In this structure there is an attractive initial fixed interest rate (the teaser interest to lure borrowers), after which the rates for your creditworthiness rise to the market level. Sometimes the increased interest is also discounted, but at the end of the loan there is a large balloon payment. This mortgage structure is often aimed at borrowers with poor creditworthiness who cannot get a fixed-interest loan based on their poor financial history.
Which rate structure?
When it comes to loans in-house loans, the rate structure that you choose may amount to the interest rate at the time of your financing. If you borrow only a small amount and plan to repay your loan quickly, a variable may make sense as you wish to repay the loan before your interest payments may be subject to adverse long-term fluctuations. However, if you need a substantial sum of money that needs to be paid off over a longer period of time, fixed probability is the smartest option if you qualify.
The best way to protect yourself against subprime loans is to preserve your credit history. If your credit is in poor condition, take measures to restore it so that you can attract a better loan rate from legitimate lenders (see How can I improve my credit score? ). Postpone your loan plans until you restore your credit score; you save on interest in the long term.
It would be useful to work with your existing mortgage lender and use your relationship to request a decent agreement for the distribution of home ownership. It is not unusual for the original lender to offer borrowers a good deal to maintain their business, but this is not always the case. So even if you get a loan from the mortgage holder, it is worth looking at what the competition has to offer.
The Bottom Line
Home equity loans come in different interest structures. To determine which is your best bet, it is important to understand how they work and how they likely affect your repayments in the long term. Fixed and variable each have advantages and disadvantages, depending on basic factors such as the amount borrowed, the term of the loan and how quickly you plan to repay it. Make sure you look at the big picture by taking into account APR and being careful with loans that offer tempting teaser figures. If a deal (or interest rate) seems too good to be true, then that’s probably true. See Home Equity loans: what you need to know for more information.