Understanding The Terms Of Your Home Equity Loans

[Feb 6, 2010.]

 

When you take out a new home equity loan, make sure you understand how the interest you will pay will be calculated. Your lender should go over your index, margin, and interest rate caps at the time of your application. Make sure that the terms originally presented to you by your lender are what you find in the Note you sign at closing. The Note and Deed are what make the transaction legally binding.

What You Should Find In The Note

The Note is the document that outlines the terms of repayment. You should find your starting interest rate. Many home equity loans have a "teaser," such as 1.99% for three months. After the teaser, you need to know your index, margin, and interest rate caps. The Note will also tell you how long you have to repay the loan. It is common for home equity loans to become due within fifteen years. You should also find the dates that your payments are due each month. If there is a prepayment penalty, or any type of balloon payments due, your Note will outline the specifics.

Index And Margin

The most common index for a home equity loan is Prime Rate. The Prime Rate normally tracks the Fed Funds Rate plus 3%. The Fed Funds Rate is set by the Federal Reserve and is the cost of money between US banks overnight. Right now the Fed Funds Rate is targeted to range between 0.000%-0.250%. Prime Rate is currently 3.250%.  If your home equity loans are tied to a different index, search online for your specific index and become familiar with how it works.

A margin is the percentage added to the index for the profit of the lender. Margins can be anywhere from zero to 5% or more. The better your credit history and the lower the loan to value ratio, the lower your margin. If your home equity loans are based on the Prime Rate plus a margin of 2%, you would be paying 5.250% in interest on your balances at today's current rates.

Interest Rate Caps

Each time the interest rate on your home equity loans adjust, they will be limited to the caps outlined in your Note. Most home equity loans adjust every month and so have no cap for the monthly adjustments. If your loan is fixed for a period, say one year, you would have a cap on how much it could adjust at the first adjustment period. Pay careful attention to the life cap. The life cap is the maximum your loan can ever adjust. If you start at 1.99%, and your life cap is 10% over the start rate, the most you could ever be charged would be 11.99%.

Search for home equity loans here.

 

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.