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Home >> Lending >> Home Equity
Home Equity Questions to Ask
I want to shop for the best home equity loan I can get. What are some questions I should ask?
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 Once you have decided that a home equity loan is what you want, and not a cash out refinance or a home improvement loan you need to decide if you want a lump sum amount from the loan all at one time, or if you will draw on this from time to time as you need funds. Answering this will help you decide if you want a home equity loan, or home equity line of credit. Each has advantages and disadvantages. Determine which works best for you.
When shopping for a home equity loan or a line of credit you should be interested in several things.
- How much can you borrow for your needs?
Ensure that you have enough attainable equity to meet your borrowing needs.
- What is the interest rate on the loan?
Ihe interest rate is based on many factors including your credit score. It is a key element in your cost of credit and how affordable your loan will be.
- Is this a fixed- or variable-rate loan, and how will that impact your monthly payment?
A fixed rate loan is more stable. A variable rate is based on an index and it may increase and decrease based on variables outside of your control. In the case of a variable rate, your lender can tell you what the maximum payment amount would be.
- How long is the loan for, when must you begin to repay, and in what amounts?
- Is the loan for 3 years, 5 years, 10 years or longer? This is the amortization of the loan and helps you determine the payment.
- The longer the term, the more time you have to pay and the lower the payment will be. This also means you have use of the lender's money longer and will pay more in interest. If this is a line of credit there may be a draw period in which you make only interest payments. If it is a loan you may need to start repaying principal and interest the next month. Also, any teaser rates would be reflected in the lender's diesclosures, as would the ending period of such a rate and the resulting next payment amount.
- What fees will you owe on the loan, other than interest, and when are they due?
You will have closing costs which may be out of pocket expenses you have to pay at loan closing. Be prepared for these as they can sometimes be significant. Your lender will tell you in advance how much they are and for what. You'll get this in writing and can use it to compare with other lenders.
- Is there a prepayment penalty if you pay the loan off early?
If you decided to re-borrow and that new lender offers to wrap your loans together, you could have a penalty due because your existing loan paid off early. This could reduce the effectiveness of the savings on the new loan. Also, if you decided to sell the property, the existing loan would be paid off early and again, you may have a penalty that makes the sale less desirable.
- Will the interest be tax deductible?
Consult your tax professional. The amount you borrow and what you use the loan proceeds for can affect this. In some cases not having this deduction available may make an alternative loan product more desirable and you are not putting your home at risk in the event you are unable to repay the loan.
- What are the repayment terms at the end of the loan?
If your loan has a balloon payment, how will you address this large payment? If you intend to sell the property it may be self-liquidating or you may plan to refinance the remaining amount. You will have to know that you will be able to get another loan.
The Truth in Lending Act and Real Estate Settlement Procedures Act will help you. These are disclosure laws that require your lender to provide you with information about the loan you are considering, in advance. This will give you time to consider your options and determine which lender, and loan product, will best meet your needs.
Published on BankingQuestions.com 7/28/06
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