3 Tips For Reading A Home Equity Loan Note

[Aug 9, 2010.]

 

When you apply for a traditional first mortgage, the Note is one of the most important documents to read and understand. The same is true with home equity loans. The Note is the document that tells you the terms of the loan. It may not always be called a "Note." Some lenders will use a different name, such as, "Loan Agreement." Whatever it may be called, you will recognize the document because it outlines the interest rate and the number of months given to repay the loan. If the loan has an adjustable interest rate, as so many home equity loans do, it will detail the index, margin, and adjustment caps. Here are 3 things to look for when reading a Note. Be sure you understand fully what you are signing.

1. Repayment Term

The repayment term is the number of months allowed to repay the entire balance originally borrowed. Second mortgages, such as home equity loans, often have 15 year terms instead of the traditional 30 years given to repay most first mortgage. Make sure you understand how many months you have to pay the balance in full.

2. Amortized Vs. Interest Only Payments

An amortized monthly payment means you are paying the full amount of interest due plus a bit of the principal every month. If the home loan also has a fixed interest rate, the monthly payments would be the same for the life of the loan. However, if the home equity loan has an adjustable interest rate with interest only payments, the monthly payment due could be different every month and you would not be reducing your balance until later in the term. If you only pay the interest due, you can expect either large amortized payments towards the end of the term or a big balloon payment.  The most important thing to be aware of is when any change from small interest only payments to larger amortized payments will occur. Consider carefully if you will be able to make the higher monthly payments when the change takes effect.

3. Interest Rates And Caps

Fixed interest rates are simple because they don't change. Just identify in the Note that the interest rate you are required to pay is what you were expecting. Adjustable interest rates are a little more sophisticated. You need to know your index, margin, and caps. The Note will tell you the name of your index, such as, LIBOR or Prime Rate. Do a little research on you index to understand how it changes. The margin normally does not change. It is the percentage added to the index for the lender's profit. If your index is 3.00% and your margin is 2.00%, your fully indexed rate (the rate your payment would be calculated on) would be 5.00%. Caps are the limitation on interest rate changes. The lower the caps, the less volatile the interest rate changes.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.