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Choosing the Right Loan
Finding the right type of loan to suit your
needs can be a bit tricky. Options like home equity lines
of credit, standard home equity loans, or other types of loans
that do not use your house as collateral can be overwhelming.
Then, to top it off, terms like Loan-to-Value, APR vs. Actual
Interest Rate, and others can be confusing and mind-boggling.
Because every situation is different, there
is no standard "one size fits all" answer.
Instead we will give some guidelines that will
help you make the right choice.
Interest
Getting a good interest rate is very important when
applying for your loan. This is a great factor to base your
choice on. It affects the amount of your monthly payment as
well the total cost of the loan.
Generally, getting a fixed interest rate is a good idea.
Variable rates can increase based on market trends or are
scheduled to increase after a certain number of months or
years. If you do choose a variable rate, be sure that you
fully understand what factors can affect the rate and how
it will affect your payments.
Try to avoid terms in your loan contract that require you
to pay penalties or increased interest rates because of late
or missed payments (
more information on terms to avoid).
The interest rate differs on each loan type. Standard second
mortgage home equity loans generally have fixed interest rates
and fixed payments. On the other hand, home equity loan credit
lines have more flexible interest rates that can be affected
by many factors.
Do the math and see what rates will benefit you throughout
the term of your loan. Don't be intimidated by the numbers,
and never be afraid to ask your loan officer questions. Because
of the risks involved, getting the right loan is very important.
Taxes
Taxes may apply to your loan depending on where you
are located and the type of loan you take out. The FTC says
that home equity credit line has less taxes involved, but
these terms are still dependent on your location. Needless
to say, you should choose the option that is more suitable
for your situation.
Payments
Your monthly payments are another key factor that
should be considered when getting a home equity loan. You
need to take into account your monthly income, and make sure
you are able to afford the monthly payments. Usually a home
equity lender will not grant you a loan if you do not meet
the necessary requirements, but a fraudulant lender will.
Home equity credit line payments are based on the amount
of money you spend from the credit line. This method allows
you some control over your monthly payments but it can become
unpredictable if you spend too much. The second mortgage home
equity loan payments are usually fixed and are easier to budget.
Closing Costs
Your closing costs will differ in amounts based on a lot of
different factors. These factors include your interests rate,
the inclusion or exclusion of certain contract terms, or the
existance of a balloon payment. It is not generally a good
idea to make your descision based on the amount of your closing
cost alone.
You should try to find a middle ground where you can afford
the closing costs without having to pay for it in the long
run. The trick is to be sure to make your own calculations
and negotiate a payment that is acceptable for you.
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